Smaller surplus

Ferrous scrap recyclers have been coping with subpar industry conditions consistently since the subprime mortgage crisis triggered the recession beginning in the second half of 2008.

The shriveled construction sector and other scrap supply-related problems most often are cited as problems by ferrous scrap recyclers, along with the competitive atmosphere created by the increased shredding capacity brought online from 2002 to 2008.

Within the past year, ferrous scrap processors and shippers that are set up to serve the export market have one additional problem with which to cope: a troubling reduction in demand and orders placed from overseas buyers.

The combination of tight supply and lackluster overseas demand has made the ferrous scrap market especially troublesome for recyclers on the Atlantic and Pacific coasts and has produced a ripple effect, making life a little more difficult for scrap recyclers throughout North America.
 

Honest snapshot

Los Angeles scrap recycler Doug Kramer of Kramer Metals Inc., who also serves as the current chairman of the Institute of Scrap Recycling Industries Inc. (ISRI), Washington, D.C., titled a March 2014 presentation he gave in Dubai, United Arab Emirates, “Demand for Ferrous Scrap and Prospects for 2014: A West Coast Perspective.”

Speaking to attendees of the 2014 Middle East Metals Recycling Conference, organized by the Recycling Today Media Group and Media Fusion, Kramer portrayed his home state of California as one that is coping with the same challenges facing scrap recyclers throughout the U.S. as well as dealing with problems unique to the Golden State.

Among the industry conditions affecting Pacific Coast recyclers has been a steady decline in ferrous scrap demand from overseas buyers during the past 30 months or so.

The U.S. shipped 22.7 million metric tons of ferrous scrap overseas in 2011, helping boost ferrous scrap prices and bolstering an industry that was in many other ways still recovering from the financial industry meltdown of 2008.

That demand dropped to just 20 million metric tons in 2012, however, and fell another 14 percent to 18.6 million metric tons in 2013. Because per-ton pricing also dropped in 2013, ferrous scrap export revenue declined by an estimated 20 percent in 2013 compared with 2012.

The decline, Kramer said, was a departure from the pattern that reigned from 2000 to 2011, when the volume of U.S. scrap exports grew by a multiple of five, according to the ISRI chairman.

In 2013 the weaker demand affected not just Pacific Coast exporters but also those on the Atlantic and Gulf coasts, as nations buying less U.S. ferrous scrap included Turkey (down 18 percent) and India (down 60 percent).

Shippers in California also were affected by reductions in buying from Taiwan (down 15 percent) and South Korea (down 11 percent). While China’s demand was relatively stable (down 1 percent), it has not been among the three largest ferrous scrap buyers since 2009, when its steel mills came into a down market to buy 13.7 million metric tons of scrap from North America and other parts of the world. In subsequent years, it has purchased less than half this amount, including less than 5 million metric tons in 2012 and 2013.

The dwindling of the export market is evident in pricing tracked by American Metal Market (AMM). Throughout late 2013 and so far in 2014, AMM’s West Coast and East Coast Ferrous Scrap Index prices have traded at a much lower range compared with its Midwest scrap price index figures.

In the early March 2014 buying period, while recyclers were able to receive from $373 to $391 per ton from Midwest mills (depending on the grade), AMM’s West Coast export index price stood at just $330 per ton, while the East Coast index price was down to $322 per ton. As well, AMM said it was at times having difficulty updating its export index prices because of a lack of transaction activity.

With steel output in the United States having been stable in the 75 percent mill capacity range, the drop in ferrous scrap export orders eventually brought prices down for all sellers. While the No. 2 shredded scrap grade as tracked by the Raw Material Data Aggregation Service (RMDAS) of MSA Inc., Pittsburgh, started the year trading at $436 per ton in January 2014, it dropped to $405 per ton in February and declined further to $388 in March 2014.

Recyclers on the western and eastern seaboards might have borne the brunt of the initial impact of lagging export orders, but it was not long before recyclers in the rest of the country shared in the misery.
 

And another thing

The reduction in export shipping represents a newer challenge on the sell side for the scrap iron and steel sector, while a competitive fight for tight supply remains the reality on the buy side.

In his “West Coast Perspective” presentation, Kramer said this struggle to find sufficient ferrous scrap feedstock to match processing capacity is especially noticeable in his home state of California.

Despite its reputation as a state with a regulatory framework that can be hostile to the manufacturing sector, California experienced manufacturing output growth of between $10 billion and $15 billion in 2007 and 2008.

That pattern was thrown into a sharp reversal in 2009 and 2010 when output declined by $10 billion to $15 billion in the Golden State, Kramer said, citing data from the Bureau of Economic Analysis of the United States Department of Commerce.

After manufacturing output in California fell by another $5 billion in 2012, the sector finally rebounded with a $15 billion gain in output in 2013. However, total 2013 manufacturing output in the state, at $205 billion, remains below the $219 billion level it was at in 2008.

Kramer showed U.S. Bureau of Economic Analysis figures from other regions of the country for the same time frame that reflected similar patterns. These numbers were one reason why he said he “still sees significant recession in the Western U.S.” and that he found himself asking, “Are we really in recovery?”

The slow-motion manufacturing rebound, which affects supplies of prompt ferrous scrap grades, such as No. 1 busheling, has been matched by an equally slow moving rebound in the construction sector.

Since construction and demolition activity is a major generator of ferrous scrap that goes into the plate and structural (P&S) and No. 1 heavy melting steel (HMS) grades, it also has created what Kramer called “heightened competition for available feedstock” in these grades.

Shredded scrap grades, the other most common type of ferrous scrap, have been affected not only by restrained economic activity on several fronts but also by a growth in processing capacity that was unfortunately timed in sync with these reduced scrap flows.

Scrap processors in many parts of the country have identified it as a competitive must to be able to produce shredded grades. Many have been heartened to find that equipment manufacturers have introduced increasingly affordable shredders that carry smaller upfront costs and potentially workable operating costs for small to medium-sized recycling companies.

Whether caused by increased demand for ferrous scrap from consumers or increased production by processors who have shredders at the ready, shredded grades have emerged as the ferrous scrap sector leader. According to the U.S. Geological Survey, Reston, Va., some 16 million metric tons of shredded ferrous scrap grades were produced in the U.S. in 2012 compared with less than 14 million tons of No. 1 and No. 2 HMS, about 7 million tons of P&S grades and less than 5 million tons of No. 1 busheling.

For a number of existing shredding plant operators, the competition has been unwelcome and has resulted in dwindling flows and margins. Although numerous new automobile shredders have come online in the U.S. in the past five years, many existing plants have greatly scaled back their operating hours and output or, in some cases, have been temporarily idled.

While shredded scrap is being produced in record numbers, few ferrous scrap processors claim they are seeing a compatible rise in operating margins or profits.
 

Status reports

Recyclers looking for signs as to how the rest of 2014 may differ from the current situation likely would receive mixed signals, as has been typical of the global economy in the past five years.

In the U.S., the automobile and light truck sector has been one brighter spot in that time frame. Americans purchased some 15.6 million vehicles in 2013, allowing manufacturers to produce at a range closer to the prerecession figure and well above the abysmal 11.4 million vehicles sold in 2009.

In February 2014, Americans were buying vehicles at an annualized rate of 15.3 million units, signaling a slight downturn in this vital scrap generation market.

The road back to a healthy construction sector in the United States remains a long and winding one. The Associated General Contractors of America (AGC), based in Arlington, Va., measures the industry’s pulse in part by tracking construction employment levels, which were rising throughout much of 2013 and in the first month of 2014.

Between January 2013 and January 2014, construction employment expanded in 195 metro areas, was level in 54 regions and declined in 90 metro areas, according to an analysis of federal employment data that was conducted by the AGC.

“It is a sign of the continued strengthening of the construction industry that nearly 60 percent of metros added construction jobs from a year earlier despite the severe winter conditions in much of the country this January,” says Ken Simonson, the association’s chief economist. “Nevertheless, the industry’s recovery has a long way to go with only a smattering of metro areas exceeding their previous peak January levels of employment.”

Perhaps providing some hope in Kramer’s operating region, the Los Angeles-Long Beach-Glendale, Calif., metro area added the largest number of construction jobs, with a 7 percent rise in employment creating 8,100 construction jobs.

Another 7,800 construction jobs were added in the adjacent Santa Ana-Anaheim-Irvine, Calif., region, while the building industry also ramped up in the Houston area (adding 7,900 jobs), the Dallas area (adding 7,200 jobs) and Baton Rouge, La. (adding 4,500 jobs).

Construction cranes have been less common in other metro areas, with net building industry job losses experienced in metro areas such as Gary, Ind.; Norfolk, Va.; and Westchester, N.Y.

“The industry is slowly digging itself out of a construction employment hole that got pretty deep during the past few years,” says Stephen E. Sandherr, AGC CEO.

Ferrous scrap recyclers will be among those hoping that the pace of that digging will increase throughout 2014, ideally generating additional scrap as well as increasing the output figures at domestic steel mills.

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