Fundamentally Sound

A number of speakers at the American Metal Markets Sixth Annual Steel Scrap Conference expressed a mix of optimism about future ferrous scrap markets and concern about the short-term outlook, most notably because of the looming “fiscal cliff,” which President Barak Obama and House Speaker John Boehner are attempting to negotiate. Despite the uncertain present, the steel and ferrous scrap industries appear poised for future growth.

Positioned for...?
In the conference’s opening session, Tamara Lundgren, CEO of Schnitzer Steel, Portland, Ore., said the pronouncements and commitments made by both presidential candidates during the campaign season to invest in U.S. infrastructure were good news for the steel and scrap recycling industries.

Despite the need for investment in domestic infrastructure projects, U.S. spending in this area has fallen significantly relative to other nations, according to Lundgren. “We rank 25th in the world in infrastructure,” she noted.

Along with investing to repair bridges, roads and other transportation arteries critical to the U.S. economy, Lundgren said, prior to the election, both candidates called for a renewed focus on manufacturing in the United States as well as the need for regulatory reform, with both candidates saying the government “needs to be an ally of business, not an adversary,” she said.

Despite this, she noted that the steel industry continued to limp along. “The World Steel Association cut its steel production growth to 2.1 percent for the year (2012). The U.S. GDP (gross domestic product) is limping along at 2 percent on a good day, which is impacting scrap generation,” she pointed out.

Additionally, the fiscal cliff stalemate has paralyzed much of the manufacturing industry.

Lundgren called for strong leadership on both sides of the aisle in Congress to resolve the problem. “This has been devastating for growth,” she said. “Uncertainty leads to people not carrying inventory. They are not investing. They are not making long-term plans. They are not consuming.”

Several other presenters during the conference also called on legislators to put their differences aside to develop a plan to resolve the debt problem.

Michael Rehwinkel, CEO of Evraz North America, Chicago, said all the business executives he has talked to have expressed concern about the looming fiscal cliff. While the concern is significant, Rehwinkel said he saw encouraging signs for the steel and scrap industries going forward, including the strength in the automotive manufacturing sector. Although Evraz doesn’t manufacture steel for the auto industry, he said, according to his discussions with representatives from companies that do, “They have a good feeling.”

The Role of Coal
Another issue that may have unexpected repercussions for the ferrous scrap market is the decline in coal prices. This decline, Rehwinkel said, translated into lower production costs for steelmakers using basic oxygen furnaces (BOFs), which use coal as a raw material. This lower input cost is making BOF-produced steel quite competitive with steel produced using electric arc furnaces (EAFs), he said.

“Our dynamics will change,” Rehwinkel said. “This trend toward more cost competitiveness between EAFs and BOFs for steel should continue, with BOFs holding an advantage.”

He added, “With the renaissance of the energy market, your competitor is the basic oxygen furnace producers.”

Too Much of a Good Thing
Most speakers at the conference agreed that North America has an overcapacity of auto shredders.

Rich Brady, vice president, ferrous resources and logistics, for Steel Dynamics Inc., Fort Wayne, Ind., said excess capacity was an obvious issue.

While in the past the shredder market was regional in nature, it is now much broader, with both domestic and international buyers pressuring feedstock, he added.

While more auto shredder operators are searching for material to process, the supply of auto hulks has declined. Although several speakers said auto production had picked up, Brady said the availability of auto hulks continued to decrease. He estimated that the pool of auto hulks has dropped to roughly 9 million tons and that the average lifespan of a car is now 10 years.

“Since the Great Recession, the scrap pool has shrunk by 11 percent going back to 2009,” Brady said. With too many shredder operators chasing less material, Brady said ferrous scrap costs would continue to escalate. “Margins have been reduced,” he added.

Because of the declining pool of auto bodies, more shredder operators are adding white goods and other products to their shredder infeed material.

Additionally, the growing number of large shredder operations has been putting greater pressure on these operators to find enough material to run profitably, Brady said.

Competition for this limited supply of material can lead to dramatic price fluctuations in ferrous scrap, as more processors begin to pursue material with their wallets, bidding up the price.

Ted Ernstberger, southern region president for PSC Metals, Mayfield Heights, Ohio, said ferrous scrap price fluctuations in the latter half of 2012 were in accordance with traditional market behavior, though with a twist. Purchases that used to be made in a particular month were being moved up by a month or so, throwing the traditional buying cycle off kilter, he said.

H. Allen Grow, scrap sourcing manager for ArcelorMittal Long Carbon North America, Harrisburg, Pa., said the U.S. is a mature scrap market. “As you put more shredders out, they are competing for the same amount of scrap. It is driving supply to different parts of the country.” He added, “Large players in the East are trying to control the market.

Offshore Opportunities
As daunting as the “headwinds” are in the short term, Lundgren said she was optimistic about the scrap and steel industries going forward. A key driver, she pointed out, is the rapid urbanization of China. With approximately 20 million Chinese moving to urban centers every year, the country will need to build roads, houses and other large-scale projects, which will require more steel and scrap as a raw material. This has led the Chinese government to encourage the growth of EAF steelmaking capacity in that country.

This growth is not limited to China, she said, noting that Turkey, South Korea and Vietnam are investing in EAF steelmaking capacity. With more EAF steel mills, these countries likely will import more ferrous scrap. “These are the long-term drivers that give us the confidence to invest in these cycles,” Lundgren said.

She added that Schnitzer has made nearly 20 strategic investments designed to boost its supply base and to expand its market share throughout North America. With the acquisitions, Lundgren said, the company was well-situated to “export to meet demand wherever it exists.” She added, “We are investing through the cycle and growing through the cycle. We will benefit from this.”

In fact, much of the optimism speakers expressed was connected to the sense that offshore markets would continue to require more ferrous scrap. The Turkish market, the largest offshore market for ferrous scrap from the United States, should continue to play a key role. The country imported 21.5 million tons of ferrous scrap last year, according to figures from the Brussels-based Bureau of International Recycling (BIR), more than twice the tonnage of South Korea, the second largest importer.

Ugur Dalbeler, CEO of the Turkish steel company Çolakoglu Metalurji and a board member and vice president of the Turkish Steel Producers’ Association, said that after steel production dropped during the recession in late 2008 and early 2009 to 17.7 million metric tons, Turkish steel production, consumption of ferrous scrap and melting capacity have all been steadily climbing. He added that steel production in the country was expected to reach 27.5 million metric tons in 2012.

Dalbeler said global EAF steel production and ferrous scrap use have both climbed since 2009, when world EAF steel production was 342 million metric tons and scrap use was 450 million metric tons. In 2011 world EAF production reached 447 million metric tons and global ferrous scrap consumption was at 570 million metric tons.

ArcelorMittal’s Grow said that as long as the economy in the Middle East remained strong Turkey “will be strong buyers of scrap.” He added, “They do buy on price. They will buy from Europe if the U.S. price is too high. If they see prices drop here, they are in the market. It really affects scrap dealers in the East.”

While buying far less ferrous scrap from the United States than Turkey does, China also should be a strong consumer of the material in the future. In his presentation, Kexuan Yao, CEO of China-based Armco Metals, said metal recycling will play a key role in the Chinese government’s goals of reducing pollution and saving energy. Yao pointed out that recycled steel requires 60 percent less energy than steel production from iron ore, reduces air pollution by 86 percent and reduces water pollution by 76 percent.

Because of these benefits, the Chinese government has established a goal to increase the consumption of scrap metal from 15 percent in 2010 to 20 percent in 2015 as the country looks to shift its steel production from BOFs to EAFs.

David Hodory, vice president of marketing and communications, David J. Joseph Co., Cincinnati, said Chinese consumers currently are known for being opportunistic buyers of ferrous scrap. “When prices are favorable relative to ore, they will be buyers of scrap. When they are not, they are out,” Hodory said.

Other countries are looking to bulk up their ferrous scrap consumption through increasing EAF steelmaking capacity. Turkey, for instance, is looking to increase its EAF capacity by 8.8 million tons by 2015. Russia also is looking to increase EAF capacity by 6 million tons, which would absorb nearly all of the country’s exports of steel scrap. Additionally, Vietnam has announced plans to add 5 million tons of new EAF capacity by 2015 and up to 20 million tons of capacity during the next 10 years.

Restricted Access
While these offshore markets offer opportunity, they also present obstacles and challenges.

In his presentation, Tim Brightbill, counsel for the American Scrap Coalition and a partner in the law firm Wiley Rein LLP, Washington, D.C., said that while EAF capacity has continued to expand, the amount of steel scrap traded across borders has increased far more slowly. He added that the free trade of ferrous scrap continued to be challenged by restrictions imposed by countries.

“Steel scrap is subject to more export restrictions globally than any other raw material,” Brightbill told conference attendees. “There is a significant problem with transparency because export restrictions change frequently, making supply even more problematic.”

He said restrictions on ferrous scrap imports and exports could have a significant effect on future ferrous scrap markets, including reduced international supply, higher international prices, lower prices for domestic industries in countries imposing the restrictions, subsidies to downstream industries in countries with export restrictions and price volatility.

The export restrictions can include outright bans, quotas, export taxes, no VAT (value-added tax) export rebates, nonautomatic licensing requirements and other administrative barriers, such as port restrictions.

Along with these restrictions, Brightbill also said Turkey, Vietnam and China all lacked the scrap supply and the infrastructure needed to generate enough ferrous scrap to feed their expected EAF production capacity expansions.

Heading into 2013, ferrous scrap processors have reason for caution, as the ferrous scrap and steelmaking industries face a number of new and lingering challenges facing the steel and ferrous scrap sectors. However, looking longer term, scrap processors and steel producers can find reasons for optimism.

The author is senior editor of Recycling Today and can be contacted at dsandoval@gie.net.