Scrap Metals Update - On the Upside

Generators of scrap metal stemming from demolition and construction projects or C&D recycling
efforts know enough about metals pricing to realize it seldom stays fixed for long.

The current year, like many before it, has offered volatility. The good news for scrap metals generators, though, is that many of the pricing changes have been in the upward direction.

Scrap iron and steel grades have gained steadily in price throughout 2003, with aluminum, copper and other nonferrous metals also enjoying more positive than negative fluctuations.

Peter Marcus of World Steel Dynamics, Englewood Cliffs, N.J., has forecast a steelmaking metallics shortage before, and he’s doing it again.

Speaking at the Institute of Scrap Recycling Industries Inc. (ISRI) Commodity Roundtables, Marcus presented his forecast through 2010 that shows a growing shortfall of ferrous scrap and other steelmaking feedstocks. The Ferrous Roundtable, held in September in Rosemont, Ill., featured an array of opinions on where the ferrous scrap market will be heading in the short term.

In 2003, the price has risen steadily. One benchmark American Metal Market composite shows a $106-per-ton mill buying price for ferrous scrap in January of this year, followed mostly by steady gains until reaching a $128-per-ton price in September.

Randolph Ehret of steelmaker Timken Co., Canton, Ohio, remarked that commodity prices have been rising as an overall trend, although he sees current ferrous scrap prices as currently being at the high end of a historic trading range that moves in a roughly $50 band.

Vicki Roche, a scrap buyer for steelmaker Gerdau AmeriSteel Corp., Tampa, Fla., said she has seen scrap prices averaging about $3-per-ton higher thus far in September. She noted that offshore demand for ferrous scrap is likely to continue and that pig iron out of Brazil is sold out through January of 2004, causing further demand strain on the market.

According to Roche, though, some of the other "perfect storm" factors that drove scrap prices up are alleviating. She noted that the labor situation that restricted DRI production in Venezuela has eased and that the Russian 30-euros tax on exported scrap could be lifted sometime soon.

Industry analyst Marcus, however, believes overall supply constraints, coupled with a booming Chinese steel industry, will make for a lack of steel furnace feedstock relative to global demand.

That shortage is already showing this year, by Marcus’ calculations, with a theoretical shortfall of 36 million metric tons of obsolete scrap in the market in his "most likely" scenario, followed by shortages of 40 million metric tons next year, 45 million metric tons in 2005 and 50 million tons by 2010.

Marcus sees higher pricing for both steel and scrap continuing through the decade. "World Steel Dynamics places the odds at 65:35 that steel shortage conditions will recur by early 2004," he stated. "And, if there is a shortage, steel prices may rise volcanically. Steel buyers may fear ongoing metallics shortages."

Marcus did not provide a dollars-per-ton figure on where ferrous scrap price averages might head, but did note that ferrous grades currently being exported to China for as much as $189 per ton could go even higher. "I could imagine a temporary spike to $220 per metric ton for #1 heavy melting steel" delivered there, he remarked.

Marcus admitted that World Steel Dynamics also predicted such a shortfall for the late 1990s, which did not come to be. "We missed," he acknowledged, citing several factors that forestalled the shortage, including the outpouring of scrap from the former Soviet bloc nations and the Chinese preference for blast furnaces over electric arc furnace mills in its new steelmaking capacity.

Demolition contractors who can profit from the copper wire and cable sales have enjoyed a slightly better scale price in 2003 as well, with many copper prices easing up several cents per pound throughout the year.

Although copper trading at more than $1.00 per pound seems hard to remember for most metals traders, it could be "Back to the Future" if a forecast presented at the ISRI Roundtables event is correct.

Addressing attendees of the Copper/Brass Roundtable, Malcolm Southwood of J.B. Were Ltd., Melbourne, Australia, predicted copper would remain on a relatively even pricing keel in 2004 with an 83 cents-per-pound average in 2004, followed by a price climb to 92 cents in 2005 and up to $1.02-per-pound in 2006.

Constrained supply, steady and slowly growing demand in North America, Europe and Japan and continued strong demand for copper from the rapidly growing economy in China will lead the predicted price rise in red metals.

Southwood said China’s strong annual growth in demand for copper—whether at 9 percent or even higher—should continue for some time, and he commented that the situation is not unprecedented.

As the economy of Japan rebuilt after World War II, it experienced an amazing 40-year surge of almost uninterrupted growth in copper demand (sometimes in double digits) as it rebuilt and modernized its industrial, residential, telecommunications and electrical infrastructure.

For scrap dealers and processors, the pricing news may be good, but the massive shifting of copper to China does not bode entirely well for U.S. dealers. Most of the copper being consumed in China, said Southwood, is going into construction, electrical and domestic transportation applications, meaning North American scrap recyclers are not likely to see any of the red metal heading back to their facilities.

In the near-term, though, as long as China stays hungry for copper, U.S. dealers should have a ready market and improved prices. Southwood said even with a conservative 9 percent or 10 percent Chinese copper annual consumption increase, "we create demand tension. If that’s what happens, the global market looks to soon be demand-led."

While other metals have surged in price as an economic rebound takes hold, aluminum has thus far drifted only slightly upward. A forecast presented at the ISRI Roundtable on aluminum forecast that metal would be sticking to its moderate gains during the next couple of years, rather than leaping forward.

Neil Buxton of GFMS Metals Consulting, London, told attendees, "We expect accelerating and above-trend growth" in aluminum demand for the fourth quarter of 2003 and the first two quarters of 2004, helping to eliminate some of the built up inventories in the market.

Buxton predicted 2004 LME primary aluminum pricing averaging 68 cents per pound in 2004 and 73 cents per pound in 2005. He remarked that the 2005 pricing "could represent a cyclical peak" in the price of the metal.

Among the drivers of this demand is the long-awaited rebound of the Japanese economy as well as an apparent recovery in the U.S. "I think the outlook is more positive than it has been for a considerable time because of where a number of national economies are right now—at the beginning of an economic upturn."

Buxton also noted that one reason aluminum pricing has not surged the way copper or ferrous scrap pricing has is because China is close to a "zero sum game" in the aluminum market. "It’s the net trade for that country that has an effect on prices," he remarked, noting that while China is a net importer of 5 percent of the world’s copper and nickel, it is actually a net exporter of 1.8 percent of the world’s finished aluminum.

But because the country is now the largest consumer of aluminum, with consumption continuing to grow at a 14 percent annual rate, it’s behavior will continue to affect the market.

Alan Alpert of Alpert & Alpert Iron & Metal Inc., Los Angeles, also pointed to tight scrap supply and competitive overseas buying "for scrap that doesn’t exist" as key current market factors.

Reasons for aluminum pricing optimism cited by Alpert were similar to those mentioned by Buxton—an apparent recovery in the U.S. and Japanese economies and solid demand from China, South Korea, India and other scrap importers.

Martin Abbott, a former metals trader who is now publisher of American Metal Market, New York, recalls predicting 10 years ago that nickel prices would continue to rise, reaching new heights as demand soared past supply. But, as he told attendees of another ISRI event, the Nickel-Stainless Roundtable in Pittsburgh in late September, that optimism was predicated on events that did not occur—such as the disappearance of Russia’s Norilsk from the market. Rather than collapsing, Abbot noted, Norilsk survived and thrived.

At this year’s event, sponsored by the Pittsburgh Chapter of ISRI, Abbott was preceded by speakers who exhibited mostly optimism for stainless steel demand and nickel pricing. "I am not as bullish as our other speakers. I have some ... reservations," Abbott declared.

At the heart of Abbott’s worries was a concern that traders are "confusing stainless production with stainless consumption." Just because mills are pumping out stainless steel, that does not guarantee the end markets for it, he noted.

Much of the demand being exhibited, he noted, is in China, where there is cause for concern that central government planners are beginning to pull in the reins of what they see as "overheated" sectors of the economy.

Other speakers at the event saw signs of economic turnaround that are beginning to deplete stainless steel and nickel inventories.

Clarence McAninch, CEO of Universal Stainless & Alloy Products Inc., Bridgeville, Pa., said the company’s sales to steel service centers are up from last year, and he pointed to stainless steel rebar as one of several markets for the metal "that is forecast to grow."

McAninch added that "there has been a definite uptick" in the economy, but that the decline in the leisure aircraft industry and the struggle to compete against low-price imports continues. C&DR

The author is editor of Construction & Demolition Recycling and can be reached at btaylor@cdrecycler.com.