Scrap Metals Supplement - A Tale of Two Markets

Newton’s third law of physics, "For every action, there is an equal and opposite reaction," could be applied to export markets for secondary commodities these days. Many recyclers thought China’s insatiable demand for commodities to fuel its growth spurt would never end. A number of U.S. recyclers eschewed domestic consumers, opting instead for the far more lucrative offshore trade during much of this decade.

While China was the major buyer of raw materials, other developing countries also helped propel export demand to unprecedented heights. India, with its burgeoning middle class, helped drive the market for many recyclables, while the petro-rich Middle East became a more active player. Even smaller Asian countries, such as Malaysia and Vietnam, expanded their roles in the export market.

PUTTING ON THE BRAKES

The export market for recyclables stumbled during the last quarter of 2008, and much of this downturn can be attributed to the decline in demand from China. Shippers with large loads on vessels destined for Chinese ports found out that their buyers, only too happy to snap up whatever was being shipped just a few months earlier, have now become scarce. Almost overnight, price and demand plummeted, with some sources reporting that prices declined by 70 percent to 80 percent, with some buyers refusing to honor earlier orders at any price. Other buyers, while not leaving the market entirely, have begun renegotiating already set deals, seeking lower prices. As a result, containers have been stacking up in ports throughout Asia without any buyers.

According to several recyclers, the buyers who disappeared from the market were often long-time customers, with some U.S. recyclers saying they had established relationships with these buyers over a number of years.

Some of the shippers who saw the biggest problems were the largest recycling firms. Schnitzer Steel, one of the largest ferrous scrap exporters from the West Coast, cited the multi-million-dollar write-offs that occurred during the final quarter of 2008 as the reason why it expected to post a loss for the quarter. In a prelude to its then upcoming quarterly report, Schnitzer Steel noted, "Combined with a number of renegotiations, deferrals and cancellations of customer contracts, this led to lower sales volumes and reduced sales prices. This is anticipated to result in a non-cash write down of the value of the company’s metals recycling and steel manufacturing inventories by an amount currently estimated to be in the range of $60 million."

As shocking as that number may appear, the actual losses from canceled orders industry-wide could exceed the $1 billion mark. Robin Wiener, executive director for the Institute of Scrap Recycling Industries Inc. (ISRI), Washington, D.C., says there is no way to know how large the problem is, but she adds that the number is definitely in the hundreds of millions, if not billions, of dollars.

Reflecting the almost total disappearance of exports during the fourth quarter of this year, prices for many secondary commodities crumbled. Copper, ferrous scrap and practically all grades of recovered fiber saw prices fall by more than half, pushing many recycling firms into a difficult predicament.

According to some reports, recyclers have closed their doors in light of their heavy losses. Many exporters have opted to rein in their offshore shipments and have looked to change payment terms.

China may be the focal point of the rejection contagion that has created such stress in the export market. However, other countries have become hot spots for shipment problems. Consumers in India also have been increasing their rejection frequency. This has created concerns on the part of some shippers, who are seeing fewer outlets for material.

In response, ISRI has been lobbying the U.S. Commerce Department, as well as a number of other agencies, to intercede on behalf of U.S. exporters. However, even with the influence of the Commerce Department, many recyclers note that their orders to China, which appears to be Ground Zero for the export debacle, are almost nonexistent. Many Chinese steel mills are either shutting down or are working at greatly reduced levels.

Recent figures have the BDI declining by 90 percent from May 2007 to the end of 2008. While on one hand, a sharply lower shipping rate would seem to be a great advantage to shippers, on the other hand, the decline tracks the overall slide in demand for vessels, which ultimately means fewer orders are being made.

The decline in the BDI is a fairly good representation of the overall global export activity. While the BDI declined by nearly 95 percent this year, as December came to an end the index showed some modest rallying, reflecting a possible renewal in export shipments. While the timeframe for the rally is too short to say that export numbers will start to improve, preliminary signs indicate the worst in export trends has already occurred.

While U.S. steel producers have enjoyed fairly healthy export markets throughout most of 2008, the import of finished steel has been declining. Despite a recent uptick in steel imports into the United States during the fall, many market observers say they feel the overall trend is toward greater steel exports.

While the Chinese market will continue to play the dominant role in the export market, the next several quarters could be challenging. After several years of strong growth, the steel industry has been struggling with acute declines in price. According to one source, of the 71 major steel companies in China, 42 posted losses for October 2008. The situation could continue, despite the Chinese government unveiling a significant stimulus package which it hopes will spur new demand.

Nonferrous metals also could see significant challenges during much of next year. China will likely continue to adjust its copper purchases downward, leaving many U.S. copper scrap exporters scrambling to find end markets. As a result, copper prices are forecast to be, on average, around $1.80 per pound in 2009, a sharp drop from earlier expectations.

Supporting the negative sentiment driven by disappointing short-term export markets, a recent Reuters/Jefferies CRB Index of 19 raw materials, including some base metals such as copper, shows the biggest annual drop since the index’s debut in 1956 after plunging 56 percent from a July record.

In one published report, analysts from Australia-based Macquarie Group Ltd. led by Jim Lennon, say, "The collapse in demand in the current quarter has been easily the largest anyone in all the industries we cover can recall, and we speak to some old people."