Scrap Metals Supplement--Extreme Conditions

UPS AND DOWNS. A review of ferrous scrap pricing in the last few years indicates a chart with peaks and troughs similar to those on a Richter scale during an earthquake.

In January of 2002, ferrous scrap markets were continuing to struggle through a market trough, with American Metal Market reporting No. 1 Heavy Melt composite pricing of less than $70 per ton. By late spring of 2002, the grade was up to more than $100 per ton—where it seemed to settle for a while until the fall of 2003, when monthly increases steadily lifted the price to more than $175 per ton in January of 2004.

Historically, that would almost certainly signal a market peak. But the see-saw was not finished rising on the demand side.

The next month, ferrous scrap shattered the $200-per-ton ceiling, and the AMM No. 1 Heavy Melt composite price even crossed $250 per ton in 2004. Some premium grades were reported to be selling at more than $300 per ton at times in 2005.

Pricing continued to hover in the $200-per-ton range early in 2005, although the seesaw moved up and down throughout the second half of 2005.

So, does the wild seesaw ride of the last few years mean the market has fundamentally changed, or was it simply another cycle in the elastic history of the market?

The answer could be yes to both questions. There is little reason to believe that market volatility is a thing of the past. Most observers would probably agree that a long-lasting market balance between scrap supplies and scrap demand remains as elusive as the Holy Grail of Arthurian legend.

But while volatility remains the same, the wild ride of the first half of this decade may have also been the result of fundamental changes in the way scrap flows globally and the way it is generated domestically.

300 MILLION TONS AND COUNTING. It will come as no surprise to anyone that the resurgence of the Chinese economy has provided many of the changes. In the past decade, China’s steelmakers have risen to the No. 1 spot globally.

Even though much of China’s steel is produced with blast furnaces, rather than 100-percent-scrap-consuming electric arc furnaces (EAF), raw materials buyers representing China’s mills have spanned the globe this decade seeking melting units—whether iron ore, pig iron or scrap—for their furnaces.

When one nation adds 200 million tons of steelmaking capacity in less than a decade, it has a profound effect on markets. In this case, it strained global scrap supplies and also familiarized a greater number of scrap dealers with the export market.

And China is not, in general, opening steel mills that are taking the business from existing North American and European steel mills.

Steel made in China is, generally speaking, staying in China to build roads, bridges, apartment buildings, office towers, cars, appliances, toaster ovens or virtually anything else one can think of that is in demand in a nation that is allowing corporations and individuals to accumulate and invest in ways that were strictly prohibited just two decades ago.

As China’s steel industry has boomed, it has not been met with a shuttering of mills in other nations. In fact, Japan and South Korea’s industries have benefited from China’s boom by exporting finished steel there, and Europe’s and North America’s mills have been producing at rates to meet their own markets’ needs.

When Chinese buyers started actively out-bidding domestic buyers for ferrous scrap, it helped send the pricing seesaw into fast motion, as the extreme athlete on the demand side gained a little more enthusiasm.

Just as restaurant owners would be reluctant to say they have too many customers—but rather too few tables—scrap dealers were reluctant to admit that there was too much demand, but rather they cited a scarcity of supply.

Throughout much of the market peak, increased scale prices brought out more scrap—the old auto bodies piled up by auto dismantlers and the rusty combines sitting in farmers’ fields. This obsolete scrap was fed into metal shredders in record numbers during the past three years.

THE HOME FRONT. But while China boomed, the American manufacturing sector that produces stamping plant cutouts, fabrication trimmings and machine shop scrap did not necessarily cooperate by churning out more scrap.

There is a two-fold problem: A lot of the fabricating and machining has moved offshore, and the remaining plants are often the most efficient ones (that is, they make the least scrap).

America still makes plenty of steel. It still makes many of its own trucks, automobiles and appliances. But the manufacturing of a wide variety of smaller items that can be shipped affordably from China or Mexico is occurring there instead.

The result is that American households consume as much steel as ever in the form of appliances and autos that eventually are scrapped, while the American manufacturing sector is generating less scrap. The Steel Recycling Institute’s statistics for ferrous scrap processed in 2004 indicate that the composition of the tons recycled in 2004 contained almost 35 percent more obsolete scrap than in 1980.

And it seems reasonable to suggest that from here on out, American scrap processors will be increasingly reliant on obsolete scrap—auto hulks, old appliances and metal harvested from demolished buildings—to provide a higher percentage of their tonnage rather than on industrial scrap.

This scrap now has several potential destinations: The 1.3 billion people of China are producing more steel and using more scrap. And in the world’s two other largest markets (Europe and North America), electric arc furnace steelmaking has gained market share, which means that even in a static economy, there should still be steady demand for scrap.

As China’s steelmaking capacity has grown, decision-makers there gravitated toward iron ore-dependent blast furnace steelmaking, rather than scrap-dependent EAF steelmaking. It is tough to say whether that was a wise decision, since while they have been less dependent on prohibitively expensive scrap, they have instead been saddled with iron ore prices that also reached historic highs in 2004.

But if EAF steelmaking should catch on in China, that could provide yet one more strain on scrap supplies.

VARIOUS VARIABLES. Several factors seem to point to a healthy baseline of demand for ferrous scrap. But in a commodities market, variables are the spice of life (and the bane of forecasters), so a few of those should probably be considered.