International Recycling Week: Steady journey, but more costly

Global inflationary pressures are in place, said panelists at a ferrous scrap roundtable session at the late June International Recycling Week online event. However, while freight rates and costs of capital have increased, the soaring price of ferrous scrap has made the pain less noticeable.

The global steel industry has bounced back from a cooling-off period in the spring of 2020, two traders on the panel said. “The demand for scrap has kept up far better than the rate at which it was generated,” Nathan Fruchter of New York-based Idoru Trading & Consulting said. “I think that’s because most steel producers kept on producing during the pandemic.”

“From February to April 2020, we shipped only 20 percent of our volume compared to the year before,” noted Ved Prakash of Belgium-based secondary commodities trading firm Gemini Corp. “After that, trade picked up. From June 2020 until now, the scrap business has been normalized.”

The greater COVID-19-related hiccups occurred on the supply side, the traders said. “Scrap is a product of affluence. If an economy does well, people spend a lot of money, they throw out more, they generate more scrap,” Fruchter said. “During the lockdowns, less scrap was generated by each household and less was collected and less was brought into yards. And there were fewer demolition projects, especially the first few months of this crisis.”

Prakash said, “The total volume of internationally traded scrap has averaged around 100 million tons or so the last 20 years. In 2020, it went down to 85 million tons. It went down because there was a standstill for three or four months around the world.”

As economies around the world have ramped back up and governments have invested in infrastructure, the upward price trajectory of steel and scrap has been steady. Also rising has been the cost of sea freight and the cost of credit.

Prakash said Gemini ships about 130,000 sea containers annually across several commodities, so it analyzes logistics costs thoroughly. Perhaps surprisingly, he said, the global rise in sea freight rates has not imposed an undue burden.

“The logistic cost percentage of [a transaction] price is usually around 20 percent,” Prakash remarked. Despite rising freight rates that have garnered much attention “It is still the same” as of mid-2021, he said, since scrap prices also have moved up. “The total price mechanism is not dramatically different; freight rates have doubled or tripled, but so have scrap prices, so the net impact is zero.”

Risk, as measured by cost of capital, has increased, however, Prakash said. Using India as an example, hesaid the cost of capital is almost $40 to $45 per ton for buyers of imported ferrous scrap. “Today, they are able to absorb it” because of high scrap prices and margins, “but in general, this is a tremendous cost.”

Asked whether the greater risk will lead to more hedging activity in the ferrous market, Fruchter expressed skepticism about the ability of bulk shippers to hedge via current methods and contract offerings. “The words volume and ferrous scrap hedging somehow don’t fit into the same sentence,” he quipped, referring to the 10 metric tons lot size of a current London Metal Exchange (LME) contract. “If you look at the Turkish contract the LME has, it’s a head spinner. How do you hedge a 30,000-ton cargo?”

Joshua Toney, who works from New York for London-based Freight Investor Services, said shippers historically don’t wish to hedge an entire cargo that size. However, he added, “I’ve seen 5,000 tons trade in sequential days in the market. If you hedge half of it, you can get that done in 10 trading sessions” for a commodity with a 30-day price horizon.

Toney added, “We’re seeing steelmakers do it, layering their hedges.” By hedging 1,000 to 4,000 tons per day “they are able to layer in their position on the time period they need to execute that hedge.” Toney urged buyers and sellers of ferrous scrap to consider the technique, adding, “If we all sit around waiting for some big entity to come and [are] waiting for that market, that’s like waiting for pigs to fly.”

Roundtable moderator Sean Davidson of Davis Index, which is headquartered in Singapore, responded that an LME aluminum contract that now has substantial trading volume was underutilized for nine or 10 years before large producer Alcoa began using it. “That’s what it took,” Davidson said.

Panelists also debated the future role of China in the global ferrous scrap market. Prakash said the push for low-carbon steel by China’s government has prompted steelmakers there to use more scrap. But he said the nation has some “410 million tons on the ground” of ferrous scrap or end-of-life steel items. Davidson ventured that improving domestic processing capacity and quality in China “might actually mean they may be able to export rather than import in a couple of years.”

Fruchter saw problems for Chinese buyers on the supply side, particularly if mills there wish to buy bulk cargoes from the United States or Europe based on newly minted Chinese government standards. West Coast U.S. bulk shippers “have been shipping scrap for 50 years to various markets,” said Fruchter. “Do the Chinese buyers want to reinvent the wheel, create a new HMS [heavy melting steel] standard? It’s absurd. To ship a cargo and to face the risk to have to take the ship back if someone decides the quality isn’t good. It’s lunacy, absurdly absurd.”

Despite concerns expressed by Prakash that nations are becoming more protectionist regarding their scrap, global demand seems poised to keep the steel and ferrous scrap sectors active, said the panelists. “I think it’s fair to say the demand for steel across the globe is looking very good for now, so that means the demand for scrap is looking good,” Fruchter said.

Davidson said that while the sizable spread between the price of scrap and hot-rolled coil steel has gained attention, long product (rebar) mills are larger volume buyers. With “rebar stuck at around $900 per ton,” he said, that could keep a ceiling on ferrous scrap prices.

International Recycling Week was organized by United Arab Emirates-based Waste & Recycling Middle East & Africa magazine.