Last week’s major commodity market development was the meltdown in the front month NYMEX WTI crude oil futures contract, which turned negative for the first time in history. The U.S. Department of Energy provided this explanation (courtesy of the WSJ’s Daily Shot): “Typically, most market participants close any futures contracts ahead of expiration through cash settlement in order to avoid taking physical delivery, and only about 1% of contracts are physically settled.
The extreme market events of April 20 and April 21 were driven by several factors, including the inability of contract holders to find other market participants to sell the futures contracts. In addition, in this case, the scarcity of available crude oil storage meant several market participants could not take physical delivery at expiration and resorted to selling their futures contracts at negative prices, in effect paying a counterparty to take hold of the contracts.”
Given the overall economic contraction and slump in commodity prices, a key dynamic for scrap markets has been which side of the equation is contracting more quickly: supply or demand. For ferrous scrap, steel mills and foundries are clearly producing less steel today and are requiring less scrap as a result. The steel mill capacity utilization rate is down to around 56-57% recently, according to AISI data, from over 80% this time last year. But the flow of material into scrapyards also declined sharply as prices dropped, manufacturers have been generating less prime scrap, retail operations have been curtailed, and auto dismantlers and others are supplying less material, meaning scrap yards aren’t running anywhere near capacity either. Although the decline in ferrous prices would likely have been even more dramatic if the supply of scrap coming into the yards didn’t drop as much as it has, that’s cold comfort to our recyclers who are faced not only with falling volumes and prices, but just about every other challenge you could think of from HR, safety, and labor issues to transportation, operations, finance and cash flow, while at the same time trying to navigate the various federal and state relief measures.
On the U.S. steel production front, Argus media reports that “Steel Dynamics said… it will target 80% utilization at its Butler and Columbus flat-rolled mills… ArcelorMittal is taking a planned outage on one of the blast furnaces at Burns Harbor. Liberty Steel will idle the rolling mill at its Georgetown, South Carolina, wire rod operations for three months because of Covid-19 hitting demand. The mill halted melting in September 2019 and shelved plans for a new EAF in February.”
As for global steel production, last week the World Steel Association reported a widespread downturn across the major steel producing countries in March. Macquarie analysts commented, “Some shocking data from worldsteel today are starting to reveal the extent of demand destruction due to the virus. In March, crude steel output tanked by 20% YoY in EU-28, by 14% in India, 10% in Japan, 8% in South Korea and 6% in the US. In China, crude steel fell by 1.7% and for the world, output was down by 6% YoY. As we argue in this report, we suspect the numbers will get worse in the coming months.
As with other markets, the global COVID-19 pandemic is heavily impacting every segment of the U.S. stainless scrap, stainless steel, and special alloy markets. From the contracting supply and demand for stainless steel scrap to falling steel mill steel production and slumping demand from end-use sectors including transportation, energy, and household appliances, markets are struggling across the board. The coronavirus crisis impacts come on top of an already difficult start to 2020 as nickel and stainless steel prices were already under pressure, and as stainless steel production continued its migration away from the West and towards Asia.
According to the latest figures from the International Stainless Steel Forum, stainless steel melt shop production in the United States fell 7.6 percent last year to 2.593 million tonnes. On the corporate front, Moody’s downgraded the corporate family rating for Outokumpu (owner of the Calvert, AL stainless steel mill) from B2 to B3 in late March, with the credit rating agency foreseeing a significant drop in stainless steel deliveries from Outokumpu over the next few quarters, “pressuring earnings and free cash flow generation, which will likely turn negative this year in Moody's view.”
As with the ferrous market, nonferrous scrap metal prices weakened in the face of primary metal price declines as global metal demand decreased due to the economic contraction. But the flow of obsolete base metal scrap, particularly at retail operations, has dropped significantly as well. As a result, scrap spreads haven’t widened as much as they otherwise would have. As always, there is a significant amount of variation in market dynamics by region and commodity, although market participants report the UBC market has been particularly impacted by reduced collections.
Second only to zinc, aluminum prices have had the worst performance at the London Metal Exchange this year, with the LME 3-mo. aluminum asking prices down 17.6% for the year-to-date through April 24. In line with the market downturn, Macquarie reported last week that “Alcoa released Q1 results… including news that its remaining Intalco capacity at 230ktpa the Ferndale aluminum smelter will be shut by the end of July, on declining market conditions. The smelter reported a net-loss of $24m in Q1.”
Late last week Fastmarkets AMM was listing secondary aluminum prices at 30-33 cents for old sheet, 32-35 cents for old cast, 34-36 cents for painted siding, and 35-38 cents per pound for MLC.
On the Chinese scrap demand front, FM Metal Bulletin reports “China has issued its sixth round of scrap metal import quotas, approving minimal volumes compared with previous rounds. China Solid Waste & Chemicals Management Bureau issued quotas for an additional 2,150 tonnes of copper scrap and 1,030 tonnes of aluminium scrap metal to be imported into China in 2020 on Thursday April 23. This compares with 222,020 tonnes of copper scrap and 191,100 tonnes of aluminium scrap approved in the fifth round on April 10 and comes at a time of copper raw material shortage in China. So far in 2020, Chinese importers have been permitted to buy a maximum 224,170 tonnes of copper scrap in total. But availability of high purity copper scrap is now questionable with a slowdown in scrap processing at Southeast Asian yards due to lockdowns imposed around the world to restrict the spread of the Covid-19 coronavirus. Copper scrap is now well sought after in China because supply of intermediate products such as blister copper is tight due to African logistics disruptions.”
Recovered Paper and Fiber
In the recovered paper and fiber markets, the drop-off in supply thus far seems to be outstripping the softening of demand for a number of major grades. Collections are down due to closed schools, businesses, and other establishments, but demand for boxboard for retail products and shipping has held up relatively well. According to the AF&PA, U.S. boxboard production is only down 1.5% this year, and RP collections (both in the U.S. and overseas) are down significantly more than that, which has supported prices due to lack of availability. Domestic OCC was trading around $20-$25 per short ton at the beginning of the year, but is up over $75 per ton right now, according to RISI.
RISI also reports “The Chinese government has released a new round of recovered paper (RCP) import licenses for this year with volumes amounting to 124,080 tonnes. The country’s Ministry of Ecology and Environment issued the six batch on Thursday to four recycled containerboard producers. Liansheng Paper’s sole Longhai mill in Zhangzhou, Fujian province got the largest amount of quotas, receiving 51,430 tonnes. Shanying Huanan Paper, a subsidiary of Shanying International Holdings, was granted 44,070 tonnes for its Changtai mill also in Zhangzhou. Nine Dragon Paper (Holdings)’s Quanzhou plant in Fujian and Long Chen Paper’s Wuxi mill in Jiangsu province received 16,210 tonnes and 12,370 tonnes, respectively. The permits the four recipients were granted in this round have been slashed by 29% from the previous batches approved earlier this year.”