Scrap Metals Supplement--Healthy Appetite

I suppose the name of the company I work for—with the words "statistics" and "steel"—gives a pretty good clue as to what I study and research. But the main focus of this presentation is going to be on ferrous scrap.

To do this, I’d first like to set out some background on the current position of the global steel industry, as world production of crude steel can be useful as a measuring device.

STEEL PRODUCTION. World production of crude steel is often considered the basic measure of steel industry performance. Globally, 2003’s production stood at 965 million metric tons, an increase of 7 percent from 2002. In fact, it has been up in each of the last five years. Meaning, the 965 million metric tons produced in 2003 marked a new world-record high.

THE DRI CONNECTION

In two nations where steel production is growing, India and Turkey, both are using electric arc furnace (EAF) steelmaking, but one is turning to scrap substitutes more than the other. In Turkey, scrap consumption has grown by 4 million metric tons throughout the last four years. That’s about an extra million metric tons per year. In that time EAF steelmaking has grown by more than 3 million metric tons, creating a growing dependency on imported scrap. In India the mix of steelmaking is also moving toward EAF mills, nearly doubling in four years. The potential scrap requirement is also up by 4 million to 5 million tons in the last four years. Indian steelmakers now import about 2.4 million metric tons of scrap per year. However, there is some uncertainty now with a new import control policy in place following an explosion in the fall of 2004 that killed 12 people. India, unlike Turkey is also a big producer of scrap substitutes, and is the world’s biggest producer of DRI (direct reduced iron). India tops the list of the world’s DRI producers at greater than 7 million metric tons produced in 2003. All told, the world production of DRI stood at 50 million metric tons in 2003, with Venezuela, Mexico, Iran and Saudi Arabia joining India as leading producers. 2004 production is predicted to increase some 17 percent compared to 2003, with the anticipated production about 56 million metric tons.

In 2004, our latest estimate shows production breaking the 1 billion metric ton barrier—yet another record high. We see 2004 panning out at 1,050 million—that’s 1 billion and 50,000 metric tons—of crude steel, which is growth of 9 percent from 2003.

Production in 2001 was 850 million metric tons. In three years that’s an extra 200 million metric tons of steel—an average of more than 60 million additional metric tons per year.

This extra production is occurring because the world economy is improving, but more importantly because of the surge in Chinese steel demand.

Here’s how China fits into the picture. Back in 1989 China was producing just 60 million metric tons of steel—8 percent of the world’s production. But steady growth that has been accelerating since the year 2000 has seen production reach the 2004 forecast of 268 million metric tons. That means China is producing one out of every four tons of steel made in the world (25 percent).

In terms of steel consumption, it’s even more impressive. China also imports more steel than any other country in the world.

GLOBAL PATTERNS. China is largely driving world growth of crude steel production.

If we look over the last 15 years in China, production has quadrupled, while Japan has hardly moved.

Elsewhere in Asia, production has doubled in South Korea and Taiwan. And India, which might be the next China, is now producing 30 million metric tons, with huge potential because its population is greater than 1 billion—second in size to China.

Thus, in steel production the center of gravity is moving into Asia.

In the traditional steel producing countries outside of Asia, the EU shows no growth; the United States shows no growth; and the former Soviet Union shows decline. (Although Russia and Ukraine are still massive steel exporters.)

However, Turkey, Mexico and Brazil show strong growth, with smaller volumes of growth in Egypt, Iran and Saudi Arabia.

We now have Asia producing nearly half of the world’s steel. If one goes back 15 years, Asia produced less than 30 percent. Meanwhile, the traditional steelmaking regions have seen their shares of world production fall.

The EU is down to making 17 percent of the world’s steel. The United States is making less than 10 percent. Back in 1950, the United States made nearly half of all world steel (46 percent).

It is a changing world seeing massive shifts in where steel is made. Steelmaking is expanding in developing countries with young economies, pushing up world totals. And that’s the normal pattern because steel intensity "eases off" as economies mature.

In the developed world—the industrialized world—production is, at best, stable or even falling. These nations are seemingly producing steel as a material of replacement, not as a material of sustained growth.

SHORTAGE LOOMING? Looking at the latest trends, are we seeing signs of steel shortages?

In the first nine months 2004, global production is up 8.7 percent from the same period in 2003, and—as we would expect—there are some key regional differences.

The United States is showing strong recovery as the economy improves, with steel production up 7 percent. Meanwhile, European Union production is up 5 percent and getting stronger in the second half, especially in France and Germany.

Poland—one of the new additional EU countries—is leading the pack, followed by Spain. Asia demonstrates the strongest growth of all, at 12 percent, though not in Japan, which is up only 1.7 percent.

But China’s production is up 21 percent, and that’s on top of 20 percent growth in 2003 and the year before that. The growth there goes on and on.

Despite measures to cool the economy, such as holding investment and bank lending down, steel production remains high, with Chinese steelmakers turning increasingly to exports to keep production levels up. Clearly, even if the Chinese domestic market softens, Chinese steelmakers are going to be a major force in global steel exports.

Looking at China a bit closer, its fast acceleration in steel production is expected to help it reach production of nearly 270 million metric tons in 2004—another record and the highest tonnage ever produced by a single country.

China, it’s often said, is very much going through a period of growth similar to Japan’s in the 1950s and 1960s—but on an even bigger scale.

As well as being the world’s biggest consumer of steel, China is also the biggest consumer of coal and cement and (after the United States) the second biggest consumer of oil.

China, without doubt, holds the key to future global steelmaking. It’s a massive steel consumer in terms of its construction and industry, which means it has become a massive steel producer. Thus, China has become a massive consumer of steelmaking materials.

What is happening in China affects the rest of the world because steel and steelmaking materials operate in a global economy.

The world economy is now a much more integrated marketplace, and strong steel demand in China is putting extra pressure on the supply of steelmaking materials, such as iron ore, coke and, indeed, ferrous scrap.

SCRAP’S FUTURE. Will this pressure continue? It looks more than likely, according to future forecasts of global steel consumption.

The International Iron and Steel Institute (IISI), Brussels, forecasts growth of finished steel consumption worldwide of 7.6 percent in 2004, with 5 percent growth in 2005. It’s being driven by Chinese infrastructure development: road building, railways, deepwater harbors and water diversion projects. In construction, steel framed buildings (the development of offices, factories, shops and warehouses) and the opening up of Western China means more steel-intensive activity.

Another boost is provided by the development of China’s low-cost manufacturing sector. China is clearly the new workshop of the world, making two-thirds of all photocopiers, microwaves, DVD players and more than half the digital cameras. By the end of 2004, China will be the world’s third largest exporter of goods after the United States and Germany.

What does all this growth in steelmaking mean for materials used in steelmaking?

The overall trend in world crude steel production in the last 20 years demonstrates annual growth of about 9 percent. Demand from steelmakers for materials like scrap is obviously strong, but just how strong? And will it be strong enough to maintain today’s high prices?

To answer this we need to examine the trends behind the two main steelmaking processes.

Oxygen steelmaking remains the dominant steelmaking process, accounting for two-thirds of global steel output and, indeed, gaining percentage points throughout the last few years. This reflects Chinese growth, where oxygen steelmaking is dominant.

Of course, oxygen steelmaking uses relatively small amounts of scrap, typically 20 percent of the charge in Europe.

On the other hand, electric arc furnace (EAF) steelmaking uses as much as a 100 percent scrap charge. To some extent, it’s EAF production we need to keep our eyes on.

Electric processes have shown strong growth, from a quarter of all world steel production 20 years ago to one-third of all steelmaking today. That alone has put a greater and greater squeeze on scrap.

In the last 20 years we’ve seen the development of mini-mills in the United States, but more recently growth of EAF steelmaking in some of the smaller, developing countries in the Middle East, Africa, South America and Southeast Asian countries, such as Indonesia, Malaysia and Vietnam.

In 2040, global production in EAF mills is expected to reach about 345 million metric tons—that’s 25 million more metric tons than last year.

China has a split of 85 percent oxygen and 15 percent EAF production. Plentiful supplies of local iron ore and a relative scarcity of locally generated scrap offer an historical explanation for this ratio.

In the United States, on the other hand, steel production is currently split 50/50, with the EAF segment growing strongly throughout the last two decades because, on the face of it, of plentiful supplies of scrap. This scrap has been plentiful in the sense that the United States is a highly industrialized and developed economy and has affluent consumers discarding large volumes of metallic consumer goods.

However, in most of the other big traditional steel producing nations, oxygen steelmaking is the process of choice, such as in China, Japan, Germany and Brazil, with Brazil sitting on top of its own abundant iron ore reserves. There is more of a 50/50 split in the United States, South Korea and India

Of the top 10 list only Italy has electric steelmaking as a majority of its capacity.

How much scrap do these nations need? A common calculation is that for an oxygen steelmaker with integrated steelworks to produce 10 million metric tons of steel it needs huge supplies of iron ore, coking coal and pig iron. Scrap content varies, but 20 percent of the charge is typical. (In the United States it can be as high as 30 percent; in China as low as 9 percent.)

In the oxygen process, to produce 10 million tons of steel, typically some 2 million tons of scrap is needed. As for the EAF steelmaker, there is a more or less one to one relationship: 10 million tons of scrap to make 10 million tons of steel.

Taking both processes into account for 2004, it can be calculated that to make an extra 90 million metric tons of steel, the world’s steelmakers need an extra 32 million metric tons of scrap.

Hence, the squeeze in scrap supply and the increasing need to transport more scrap over longer and longer distances.

GOING WITH THE FLOW. Examining international trade in ferrous scrap and how it moves around the world, a simple logistical problem becomes apparent.

The areas where recycled scrap is processed tend to be those areas where steelmaking is not growing, and the areas where steelmaking is growing tend to be the areas that are not self-sufficient in scrap generation. This creates a need to move more scrap around.

International trade in scrap is now a key growth area. Five years ago, slightly more than 50 million metric tons of ferrous scrap crossed an international border. In 2004, those exports will have grown—to around 85 million metric tons. That is an extra 30 million metric tons of scrap exports in just five years, or a 50 percent increase.

But if the tonnage has gone up by half, that’s nothing compared to what’s happened to the value. It has tripled! The value of world trade in ferrous scrap is up from $8.3 billion in 1998 to $12.7 billion for 2004.

Regarding trade patterns, the United States leads the exporters with more than 10 million metric tons in 2003.

In 2004, U.S. steelmaking production climbed, meaning domestic scrap demand was up, creating tighter supply and higher prices. Despite that, U.S. scrap exports are still riding high. In the first eight months of 2004, scrap exports were up by 3 percent by volume, with the average export value per ton up by 25 percent! (From $190 per metric ton average export value in 2003 to $240 dollars average for 2004.)

U.S. exports are travelling far and wide. Most are going into Asia, especially to China and South Korea. But export markets in South America and in Europe (particularly Turkey) are also being served.

Scrap exports are also on the move from Russia, Ukraine and Kazakhstan. Again, some 10 million metric tons are spreading far and wide, but predominantly into Europe and Asia. Also among the top-six exporters are the U.K., Germany, Japan and France.

Switching now to imports, the top six list is headed by Turkey, followed by China, Spain, South Korea, Germany and Italy.

In 2000, China was importing around 1 million metric tons quarterly in 2000 but is now running at levels of 3 million metric tons per quarter. In 2003, Chinese imports exceeded 9 million metric tons, but in 2004 it will probably be 11 million metric tons, with 30 percent of that coming from the United States (Japan and Kazakhstan are also large providers.)

While South Korea and Spain import at relatively constant levels, Turkey is showing significant growth, currently receiving imports of more than 3 million metric tons per quarter. Half of that is coming from Eastern Europe (Russia, Romania, Georgia and Ukraine), with most of the rest coming from the 15 pre-enlargement EU nations and just 6 percent coming from the United States.

In the first eight months of 2004, China, South Korea, Spain and Turkey together have imported tonnages up 10 percent from 2003, with the value up 60 percent. Ferrous scrap imports are up not just in these larger nations, but in a host of other steel producing countries such as Taiwan, Malaysia, the Philippines, Thailand, Egypt, Iran and Mexico.

FUTURE SHOCK. With world demand for steel pushing up requirements for scrap, this squeeze is pushing up the scrap price in all world markets. Prices are currently the highest they’ve ever been.

To determine future pricing trends for ferrous scrap, important questions include: How big is the market for scrap? And how will it grow?

An examination of estimates for scrap needed to feed steel production shows how in four years, the scrap requirement has grown from 400 million metric tons needed in 2001 to 470 million metric tons needed this year.

The steel industry meets this need in part with internal steelworks generation of mill scrap. Additionally, there are scrap substitutes like DRI and small volumes of pig iron. After these materials, the steel industry is dependent on merchant scrap—the ferrous scrap that is now often exported beyond international borders.

If one forecasts steelmaking into the future, one can determine the demand for merchant scrap.

Our set of forecasts for 2005, 2006, 2007 and 2010 predicts crude steel production growth being 5 percent per year for China and 3 percent for the rest of the world. This could be a conservative, as some other analysts are predicting 8 percent growth in Chinese steelmaking.

Subtracting steel mill prompt scrap (which we see as slightly falling because of efficiency gains and new processes like thin slab casting) and subtracting for DRI (where there will be further growth, but somewhat restrained by high gas prices), this leaves in our view another 25 million metric tons of merchant scrap needed in 2005, and an extra 100 million metric tons needed by 2010.

From 1998 to 2010, there could be a global increase in merchant scrap demand from 235 million metric tons in 1998 to 388 million metric tons by 2010. This is an increase of two-thirds over a 12-year span.

Thus, an amazing rate of acceleration will be needed if scrap collection is to keep pace with the demands of steelmakers.

In just the last six years steelmakers have needed an extra 57 million metric tons of merchant scrap, with an average yearly increase of about 10 percent. But over the next six years that need may grow by a further 100 million metric tons, based on an annual rate of an additional 16 million metric tons per year.

Now, to my mind, scrap is finite. After all, we can only discard so many cars and washing machines in any given year. We can only demolish so many buildings. While we can always squeeze a little more out of the system, one can’t simply turn on a tap to create more.

One can argue that there are going to be more and more metallic goods in the system that ultimately will be scrapped. (For example, 42 million cars were made in 2003. In 2006 global automaking will have grown to 50 million cars.) That means more end-of-life consumer goods, but it’s doubtful whether that will be enough to sustain this sort of growth .

I see a future where demand for scrap is going to grow larger, which means the supply of scrap is going to remain tight, which means prices for scrap are going to stay high.

The author is director of operations at the Iron and Steel Statistics Bureau in London, and can be contacted via e-mail at steve.mackrell@issb.co.uk.