Taking Some Hits

Through several years of healthy demand and high prices, recyclers (especially veteran recyclers) were quick to point out that the good times would not last forever. Some even expressed the thought that when the market dropped, it would probably drop steeply.

Trying to time the market’s drop is generally considered a hopeless cause, but in the early part of 2008, some industry analysts and recyclers were willing to speculate that a noticeable drop in demand could tie in to the completion of projects in and around Beijing for the Olympic Games.

Coincidental or otherwise, markets did start softening as China took a pause for the Olympics. But rather than being a seasonal late summer slowdown, demand and pricing for scrap commodities across the board fell sharply in September and October.

By November, the fallout from the market drop included excess inventory throughout much of the supply chain and an outbreak of attempts to renegotiate or break contracts to purchase scrap.

The high-stakes (often long-distance) games of hot potato have resulted in financial pain for brokers and recyclers in particular, though agents for some consumers have stated they do not have the resources to pay for loads of scrap at pre-collapse prices.

For recyclers, the New Year’s baby of 2008 could easily have been outfitted with a silver spoon in its mouth.

Pricing calculated by Management Science Associates Inc., Pittsburgh, through its RMDAS (Raw Material Data Aggregation Service) system showed ferrous scrap spot buying averaged $418 per ton for prompt grades and $342 for No. 1 HMS in January.

Similarly, buyers paid more for nonferrous metals, such as copper scrap, in January compared to the last two months of 2007, as the year started out with upward momentum that would carry on into the spring convention season, when recyclers gathered for the Institute of Scrap Recycling Industries Inc. (ISRI) Annual Convention & Exhibition in April and the Bureau of International Recycling (BIR) World Recycling Conference in May.

The ISRI Annual Convention April 6-10 at the Mandalay Bay resort in Las Vegas attracted record numbers of attendees and exhibitors, as the scrap market enjoyed some of the strongest demand and highest pricing in its history.

In between trading and shopping for equipment, attendees heard presentations that outlined ongoing demand for most secondary commodities.

At the session focusing on ferrous scrap, steel industry analyst Aldo Mazzaferro of Goldman, Sachs & Co., New York, remarked that even with the economic slowdown, "U.S. steelmaking is short of capacity" to serve the domestic market, which is why steelmakers were charging $1,000 per ton for hot-band and $850 per ton for rebar at the time.

American steelmakers were producing at about 90 percent to 92 percent of capacity, so "there’s really not much else to squeeze out of U.S. mills," said Mazzaferro. Additionally, the weak dollar was not attracting imported steel, meaning "essentially there is a bidding war for imported steel."

John Harris, a metals buyer for ArcelorMittal based at one of its Canadian locations, said scrap dealers in the U.S. were benefiting from the weak dollar. "No steel is coming in here, [and] scrap is leaving at a faster rate because it’s a good buy anywhere in the world."

The feeling of prosperity carried forward to the BIR World Recycling Conference in late May in the European resort town of Monte Carlo.

At that event, Recycling Today reported that "a global economy fueled by rapid growth in Asia is continuing to place a strain on the ability of metals producers to satisfy a growing appetite for a variety of metals."

At the time, ferrous scrap was trading for as much as $700 per ton and copper scrap for as much as $3.50 per pound.

As China continued to buy heavily, another one of the world’s fastest-growing markets for scrap, India, was perhaps getting ready to kick into high gear, according to Uijwal Munjal of Rockman Industries and the Hero Group, a family of 20 companies based in India.

Referring to India as being "a few years behind China," Munjal noted that India’s current consumption of metals, such as aluminum and copper, matched where China was at some point in the 1980s or 1990s.

He remarked that the "rapid growth in generation and distribution of electricity in India is the biggest driver of growth for aluminum consumption," though he also pointed to construction, transportation and packaging as helping to fuel India’s 8 percent to 9 percent annual growth in that metal’s consumption.

However, a combination of economic turmoil in the U.S. and severe anti-inflationary measures by China’s government was about to create a sharp turn in markets that completely tipped the supply and demand balance virtually overnight.

While August pricing for some commodities revealed signs of weakness, for many recyclers the week after the Labor Day holiday served as the signpost that a new demand scenario was in effect.

"Ferrous scrap recyclers received significantly lower bids for their scrap iron and

Factors cited in the ferrous market during the early part of the price drop were "a continued weakness in overseas demand for America’s ferrous scrap; slower melting schedules at North American steel mills; and a healthy supply of ferrous scrap at processing facilities that allows mills to comparison shop extensively on the spot market."

Far worse than a new pricing paradigm for many recyclers, however, was the flurry of cancelled orders that arose, particularly from China. (See "Tension at the Table" on Page 34.)

Shippers of virtually all commodities—ferrous and nonferrous metal, recovered fiber and plastic scrap—have reported that large numbers of agents, brokers and buyers who placed orders for delivery in October and November have refused to honor their contracts.

Many recyclers have spent significant time in trying to chase down former buyers, renegotiating a purchase price or attempting to reposition containers of scrap so they can be sent to willing buyers.

The economic consequences for many recyclers are still being calculated, but losses in the millions are being reported off the record, and publicly traded companies will soon have to disclose how badly they have been affected.

Sims Metal Management, which has not reported any direct involvement in unpaid shipments, issued comments accompanying its most recent quarterly report that lay the groundwork for less attractive financials to follow.

CEO Daniel Dienst remarks, "For the steel and metal markets, what began as a seasonal slowdown and overstocking environment has now been compounded by a worldwide financial crisis perhaps without precedent in our lifetime. "

Typically, features such as this one will include the guesses of one or more observers about where the market will head next.

Considering the road that recyclable commodities have traveled in 2008, to offer such a forecast seems about as logical as trying to predict the winner of the 2017 World Series.

What recyclers wish for more than anything is a return to a healthier level of demand for scrap products. Most profess not to be fixated on a return to high prices—they just want assurances that there are homes ready to melt, pulp or otherwise consume the scrap commodities they collect and process.

In his message to Sims Metal Management shareholders, Dienst remarks, "the United States, as the origin of the financial contagion, is certainly not immune from the woes of the global financial crisis and current challenging global business climate. Customers and consumers alike are adjusting their values and levels of raw materials and finished goods inventories against the backdrop of uncertain demand and production prospects."

His comments serve to acknowledge that the current storm is a serious one, and recyclers cannot be certain whether the next wave will lift them up or push them farther away from shore.