The stain on stainless

Industry experts, including consultants and journalists, were way off base in their forecasts for nickel and stainless steel in 2015. In late 2014, most projections said nickel prices would range from $17,000 to $20,000 per metric ton on the London Metal Exchange (LME) during 2015.

A research analyst at Alto Capital said prices would average $20,000 per metric ton because of the Indonesian nickel ore ban and an expected shortfall in supply in early 2015.

However, as the summer of 2015 gave way to fall, nickel was hovering a touch below $10,000 per metric ton, or about $4.40 per pound.

While the price of nickel is down, stocks are up, with 428,220 metric tons in LME warehouses as of Oct. 28.

The fact that 75 percent of stainless steel is iron, and the iron market is down, too, is not helping the situation. As a result, stainless scrap is barely flowing.

Meanwhile, China has become the dragon in the market, producing more than 50 percent of the world’s stainless, yet using little offshore scrap in its production.
 

An abnormal market

“It is not a normal market,” says Arnold Fish, founder of Lake Shore Metal Recycling, based in Skokie, Illinois.

Fish has been buying and selling scrap metal domestically and internationally for more than 35 years.

“There’s a shortage of scrap,” he says. “Stuff is not coming in as it ordinarily would. It’s hard to get an appointment.”

Randy Castriota, president of Castriota Metals, Pittsburgh, says, “We’ve had six months of declining steel prices.

“I’m an optimist,” he continues, “but I’m also a realist.”

Castriota says he is seeing little movement of stainless steel scrap. “It is very bad now,” he says. “Ferrous and nonferrous markets both are going down,” Castriota continues. “There is no demand.”

Fish says in a typical stainless steel cycle, the market is solid from August into the fall, declines around Thanksgiving, rebounds in January and maintains strength in April and May. However, this may be a thing of the past, he says.

Fish blames the dislocation in the market on speculator concern over currency, Greece, oil prices and other factors that should be irrelevant to stainless steel scrap movement. He says he sees the same thing with markets from aluminum to zinc.

Jim Wilkoff, president of Wilkoff & Sons Metals, Cleveland, says he thinks the current situation is not a result of business cycles but of an oversupply. “More nickel will be consumed in 2015 than in 2014, but it won’t feel that way,” he says. “The mining companies got ahead of themselves.”

He says expansions at mines have stopped, even though no closures have occurred yet.

“Mining companies got into trouble assuming China would keep needing raw material,” he says.

Others agree.

“Until LME stocks are reduced, China reduces exports and domestic mill orders increase, you will not have any change in scrap,” says Barry Hunter of Hunter Alloys, Boonton Township, New Jersey.

“Manufacturing in this country is stressed,” Hunter says. Automotive is doing OK, but the auto business uses comparatively little stainless. “Every other sector is reduced,” he continues. “And obsolete scrap is not attractive.”

Wilkoff says, “The flow of scrap is very poor—and not just stainless but all the nickel alloys.”
 

China's influence

China’s dominance of the stainless steel market is a relatively recent phenomenon. The country went from being a bit player to producing more than 50 percent of the world’s stainless steel supply. China continues to turn out stainless steel despite the current market.

“They have flooded the market,” Hunter says of Chinese stainless steel producers.

As a broker, Hunter has watched the center of the stainless steel industry shift from the United States to scattered Asian countries, such as Korea, Taiwan, Japan and India, to Europe.

Today’s market is dominated by China, he adds.

The two largest mills in the United States and the two largest in Europe are owned by the same companies. So those two markets have, effectively, become one and the same, sources say.

Wilkoff is reluctant to blame everything on China. He says part of the oversupply is the result of a miscalculation by European stainless producers back around the year 2000. The Europeans saw demand perking up in China and knew it took a lot of sophistication to produce stainless—industrial sophistication the Europeans believed the Chinese lacked. They figured it would take 25 years for the Chinese to get up to speed with stainless steel, so European producers expanded their capacity to meet the anticipated Chinese demand. However, the Chinese built out in five years and met most of their own demand, leaving the Europeans overbuilt, he explains.

“China is a major market. The U.S. is now a secondary market,” Wilkoff says. With China producing the majority of the stainless steel, Europe, the United States and Japan together now represent perhaps 40 percent of the world market.

So heavy is Chinese production that the European Union has put sanctions on Chinese stainless, saying the material is flooding the European market. The United States is starting to look at similar protective measures.

Meanwhile, China, which had heavy demand for stainless and other metals, providing a solid base for the market, simply stopped buying scrap metals. “When they stopped, it drove the price of metals down,” Castriota says.

Castriota says the Chinese not only have stopped importing stainless and aluminum scrap, but they also have closed some of their homeland manufacturing sites. “China, which guaranteed lifetime employment, is laying off people. It is a house of cards built to support their yuan.”

That may point to a glut of stainless and other metals in China’s domestic market.

Wilkoff says the Chinese market is too young to generate major volumes of scrap internally. The country’s auto industry, for example, is just 10 years old. Not a lot of obsolete material is coming from a segment of the market that young. He makes the same argument for China’s consumer goods sector, demolition sector and other scrap-generating sectors.

“If China reduces exports, that’s a game-changer,” Hunter says. “If the price of nickel goes up, that’s a game-changer.”

However, neither of those factors will do much to boost domestic manufacturing here in the United States, and it is manufacturing that generates demand for stainless steel in the domestic market.

While he concedes the automotive and housing markets are doing better, Castriota points out that neither is a big consumer of stainless. Markets like drums and rotors are not going to support the entire stainless sector. And the 304 and 316 stainless steels are not thriving. In early fall, the former was trading around $7,500 per metric ton, and the latter was roughly $11,200.

“You have to have manufacturing—you need to produce a product that will generate scrap,” Hunter says.

On top of that, to reduce the surplus of stainless steel, manufacturers will need to use more stainless in their products. It is a difficult fact that the trend is in the opposite direction.

Castriota notes that extensive use of 400-series stainless in appliances such as dishwashers is history. “They’re plastic, mostly,” he says. “They are not using steel.”

Stainless steel enjoys some market security in the specialty sector. Yet, much of this scrap has been removed from the general market as producers work with a handful of recyclers in a closed-loop recycling system.
 

Seeking stability

The need to keep stocks current and moving is echoed again and again by sources.

“My gut feeling is that we will see stabilization in the markets very shortly,” Wilkoff says.

However, the outlook for a bounce back in prices is much cloudier. “Now you’re dealing with world economies,” he says.

“It will change,” Wilkoff assures. “History tells us about supply and demand.”

The challenge is to survive the cycle.

“If you want to make money, you have to make your money on the margin,” Hunter says.

“Sell into the market,” Fish agrees. “When you have a truckload of material, sell it. Hopefully, you can make a profit on new material.”

Castriota says, “I’m selling everything I have when I get it. I’m selling and trying to make it on the margin.”

It is not that easy, however.

“Our spreads are thin right now,” he says. While the percentages are the same, the numbers overall are smaller, so the dollars are not as big.

Even surviving on the margin percentage can be hard to do in today’s market, according to sources. Chinese stainless steel production uses limited volumes of stainless scrap from the United States, preferring nickel pig iron. Overall, Chinese producers use 25 percent to 30 percent scrap in their products, while European and U.S. producers’ charges use approximately 70 percent scrap.

Fish says most domestic market indicators are good, citing respectable numbers from auto sales, employment and real estate. “All the base products are good—except the LME market does not see that.”

Speculation on the LME is at the root of the problem, Fish says. Only a major, fundamental market shift will change that. The big unanswered question becomes whether the Chinese will have to purchase scrap on the international market. Few observers say they see the Chinese jumping in with both feet anytime soon. Yet, the Chinese have been known—many times and in many markets—to surprise the recycling industry with major demand surges.

Castriota is not so sure. He says his big hope for improvement in stainless and the other metals is a return of U.S. manufacturing. However, he says he knows two factors that argue against a major upsurge in domestic manufacturing. The first is U.S. tax laws, which have chased all manner of companies offshore. The other is the existence of cheap labor overseas.

“There is always hope for a turnaround,” Hunter says. However, he says he sees little likelihood of that happening between now and the New Year, or even by spring. “Today’s market is the current reality,” Hunter says. “Will there be change? In five years, we’ll know.”

Fish, likewise, is bewildered by today’s situation. “The market will improve when the exact opposite of what caused it to go down happens,” he says. “There is no rhyme or reason to what is going on. You don’t have normal business cycles because of what is happening on the LME.”

Sooner or later, normal business cycles should reassert themselves and allow the market to adjust. Then the stain on stainless scrap will be blotted out. However, few if any sources say they see that transition coming any time soon.

If there is good news in that outlook, it might be that predictions have been wrong in the past.

The author is a Cleveland-based contributing editor to Recycling Today and can be reached at curt@curtharler.com.