Ups and downs

The stainless steel scrap market has been one of the strongest in the metals recycling industry over the first half of 2014, owing to a period of rising nickel prices and strong U.S. demand for scrap during those months.

A number of inter-related factors have converged over the last several months to keep the market for stainless steel scrap strong and the price of nickel, a key component, high.

One major factor has been a redistribution of stainless steel production capacity in Europe and the United States, with European mills closing or cutting back on capacity, while in the U.S., the ramp-up of an additional stainless melt shop in Alabama has increased the need for scrap to unprecedented levels.

Meanwhile, supply concerns are threatening to affect the world’s single-largest producer of stainless steel, China, a country that has used less scrap as a feedstock than other major producers. A ban on the export of Indonesian nickel ores, an important source of nickel units for Chinese mills, is now threatening to affect the cost structure for these producers, with low-cost stocks of nickel ores and nickel pig iron (NPI) in that country possibly nearing depletion.

Demand for scrap from U.S. mills has reportedly ebbed as of late August, but nevertheless, a number of industry insiders remain upbeat about what they say is one of the hottest metals markets in the recycling industry this year. A key question that remains—and that potentially is affecting nickel levels and prices on the London Metal Exchange (LME)—is whether or not the world’s largest producer of stainless steel will find it necessary to use more scrap from the international market.
 

Major events

When 2014 began, stainless steel scrap was in high demand in the United States, now home to four major producers of stainless steel. During the early months of 2014, the newest melt shop in the U.S., Outokumpo Stainless USA, located in Calvert, Alabama, was ramping up production, increasing stainless steel scrap consumption in the U.S. to new levels.

This new development occurred alongside a comparable decrease in production at various European stainless mills, leading to the export of some stainless steel scrap from Europe to the United States in the absence of other buyers.

Another critical event that has played out over this time has been the ban on the export of nickel-containing ores from Indonesia. The ban has in turn threatened Chinese producers of austenitic stainless steel because much of Indonesia’s nickel ore has been exported to China, where it is processed into nickel pig iron (NPI) for use in that country’s stainless steel production.

Barry Hunter, president of Hunter Alloys, based in Boonton, New Jersey, and a past president of the Brussels-based Bureau of International Recycling (BIR), has referred to the Indonesian nickel ore ban as a “game changer” that could eventually affect international scrap flows and pricing.

“Whoever is the lowest-cost producer has the advantage, and in the U.S., the lowest cost production has always been related to the availability of scrap,” Hunter says. “In China that low-cost position was achieved with NPI, but that may be eliminated in the future.” Just when that could occur is not all at clear, but the timing would also be critical, Hunter says.

China has traditionally used less than 30 percent scrap for stainless steel production, Hunter points out, compared with mills in the U.S. and Europe that melt closer to 70 percent scrap.

During 2014, the average monthly price of nickel, an important ingredient used in manufacturing austenitic stainless steel, showed several increases on the LME, reaching a high point for the year in May at $19,429 per metric ton.

More recently, however, U.S. demand for stainless scrap has slowed, buyers and sellers say, and the price of nickel on the LME has stabilized. Industry insiders point to conflicting reports of a decrease in production at the Calvert melt shop as one reason.

“It would appear there’s been a little bit of a slowdown,” says one U.S.-based recycler. “The mill has been firm about saying they’re living up to their commitments,” he adds, noting that any such slowdown, if true, wasn’t likely market-related but perhaps more of a maintenance issue.

Interestingly, levels of nickel in LME warehouses are now at record levels, a factor that would appear to put downward pressure on pricing, but that movement has been disproportionately smaller, market watchers observe.

According to a Roskill Information Services “2014 Nickel Market Outlook,” combined nickel stocks from various sources, including LME warehouses, are now at a 10-year high. Since May however, prices on the LME have fallen only slightly to an average level of $18,569 per metric ton for August 2014. Even with the recent LME price declines, the monthly average is still up 25 percent from last year, buyers say, even though U.S. demand for scrap has cooled.
 

Expert forecasts

“The 5,000-pound gorilla in the room is China,” says Hunter, who points out that China now accounts for half of the world’s stainless steel production. The Indonesian export ban has been the major threat, and it was further compounded in early September 2014 when the Philippines, another supplier of some laterite ores to China, also announced it was considering such a ban. Now, market watchers wonder whether China will be forced to consider scrap as an alternative, at least in the near term.

“Everybody in the business is asking the same question, and nobody knows the answer,” says one industry scrap buyer.

It has been reported that China beefed up imports of ores from Indonesia during the latter half of 2013 in anticipation of a possible ban. Now, many stainless market watchers believe it likely those stockpiles may be nearing depletion.

Hunter observes that while in the last couple of months a sufficient amount of scrap has been available to stock the increased U.S. demand, that could all change if and when China decides to enter the scrap market in earnest.

“That would be the next major game-changer,” Hunter says.

In the first part of the year, when scrap supplies were tight, the U.S. imported scrap from Canada and Mexico, in addition to Europe. Hunter refers to U.S. Census Bureau statistics indicating that in the first six months of 2014 the U.S. imported 65 percent more scrap from Canada than in the first six months of 2013. An even larger increase was reported in Mexican imports. And imports from Rotterdam, reported to be zero in 2013, tallied 10,000 metric tons.

But up until now, says Hunter, Chinese buyers have not entered the international stainless steel scrap market to substitute for NPI.
 

Increasing margins

Another factor that has changed over the course of the year is margins to the wholesale market. According to Hunter, during earlier months, wholesalers were paying more for scrap, while mills were at historically low discount levels to the LME price of nickel. He says processors “overpaid for scrap to make every effort to get ahead of the market.”

“The wholesale market tried to get consistently long,” reflects Hunter, “anticipating that demand was not going to stop, that the mills would have to decrease their discount rate and that the nickel market was going to continue to rise, three factors that, all of a sudden, changed.”

Now, with the nickel market having levelled off, buyers don’t have the same sense of urgency and can look for opportunities to increase their margins, which were close to nil in early 2014.

Tim Spiro, director of the stainless steel and high-temp alloys department at Alpert and Alpert, based in Los Angeles, says mills have reduced the percentage they are paying for the nickel in the stainless steel scrap they buy from earlier this year.

“The mills have slowed down,” he says, noting while the reductions have not been excessive, “they have reduced their melting capacity, and with the amount of nickel in LME warehouses, it’s put downward pressure on the LME market and scrap prices.” This has consequently affected the stainless steel scrap market.

“Right now it’s pretty much a buyers’ market,” Spiro says, explaining, “The mills have more influence on the price of scrap.” Also, he says, there’s more scrap available.

Conversely, he says, in the beginning of the year, mills had to restock their inventories during a time when less scrap was available or being generated.

“Two to three months ago, it was a sellers’ market,” he says, noting that those who owned scrap had no trouble selling it. However, the blenders were certainly squeezed, as they had to pay high prices for scrap, yet mills were hesitant to raise their prices.

“It’s been a very, very good year as far as the ability to sell scrap to processors and stainless steel mills,” says Spiro. “It’s just the spread has been very narrow.”

Now, Spiro says, margins have improved a little.

“The buyers are setting the tone now,” he says. “There’s enough metal, and the processors can say no if somebody tries to push them above their level.”

Because of that, Spiro observes, “I think the margins are improving, but they aren’t great. It’s a high-volume, low-margin business at best.”
 

Promising signs

Overall, Spiro says he’s more encouraged about the stainless steel scrap market these days, particularly because of the supply threat created by the Indonesian export ban and because not much new nickel production, a costly and risky proposition, is due to come online in the next five years.

Spiro observes that while the LME price of nickel has levelled some, its continued presence at between $18,500 and $19,000 is a telling statistic.

“The fact that it’s been level for the last couple of months for me is a pretty positive sign when the need for raw material has decreased,” he says. “Nickel has remained fairly consistent, so that indicates some underlying strength in the market.”

Spiro says high stocks of nickel in LME warehouses could be another signal. “Every week they’re going up, but the LME market is not going down, and the mills are lowering their prices.” He conjectures something must be supporting nickel prices.

As to what could account for nickel’s strong LME presence, Spiro points to several bullish signs, including the expectation that China could enter the scrap market.

“I think people are looking to the future is my guess. The market is still up 25 to 30 percent. I see that as a good sign that the LME is being supported.”

Spiro also mentions the lack of new nickel production capacity.

“There hasn’t been the investment made from the nickel production side,” he says. “If this stainless steel demand increases at 4, 5, 6 percent per year for the next two years, we’re basically going to have a deficit on the supply side.” Widely accepted industry estimates put the annual growth rate of the stainless steel industry at around 3 to 4 percent.

Another U.S.-based scrap buyer also sounds a positive tone, referring to an order backlog from the mills that is “out several months on most products,” something that hasn’t been the case for several years.

He says the stainless steel scrap business tends to mirror the overall confidence level in the U.S. economy, which is upbeat.

“You can have these short-term disruptions,” he says, “but they’re not really indicative of the state of the entire complex.”

He also refers to a recent price increase announced by one of the major players of flat rolled stainless steel products as a telling sign going forward, since in some cases end product price increases run the risk of being roundly rejected.

“The ability for a price increase to stick indicates a pretty healthy market,” he says.

For his part, Spiro says his colleagues are hopeful that stainless mills will produce at higher rates in the fourth quarter and that Indonesia’s export ban, if continued, will further trigger the market.

“My feeling is [Chinese consumers] are going to become a pretty strong importer of stainless steel scrap and, when that happens, you can really, really change the supply and demand scenario, and you may see LME stocks start to come down,” Spiro observes.

While the experts can’t predict when the next significant changes could occur, most agree the timing is critical.

The author is managing editor of Recycling Today Global Edition and can be reached at lmckenna@gie.net.