May/June 2016
Falling commodity prices, soft U.S. manufacturing output, weaker overseas scrap demand, and excess Chinese production all contributed to unprofitable business conditions and continued scrap industry consolidation in 2015.
By Joe Pickard
Market conditions for West Coast scrap processors were difficult enough at the start of 2015, as waning overseas demand, a strengthening dollar, tight scrap supplies, and falling primary commodity prices made it increasingly difficult to conduct business profitably. The situation went from bad to worse when dock workers slowed down, then shut down 29 West Coast ports. So, in early 2015, scrap that was already difficult to sell due to market conditions became even harder to ship. In fact, the volume of ferrous scrap shipped from West Coast ports to key importer South Korea in January and February 2015 plunged by two-thirds compared with that shipped in the same period in 2014, according to U.S. Census Bureau data.
The port problems jeopardized West Coast exporters’ ability to supply their international customers and had major logistical as well as supply ramifications for U.S. scrap markets. From January to February 2015, the Scrap Price Bulletin (New York) composite average price for No. 1 HMS fell more than $90 a gross ton, to $234.17. Other published sources indicated benchmark ferrous scrap grades were down $100 a ton or more in certain regions in February, the sharpest monthly decline since the depths of the recession. By November 2015, benchmark ferrous scrap prices would drop an additional $90 a ton, pushing prices to their lowest levels since 2009. Other scrap commodities were not immune to this trend. As crude oil prices declined, scrap plastics lost half their value over the course of 2015. Nonferrous metal prices all ended the year down compared with their 2014 levels. How could scrap market conditions deteriorate so quickly and so badly?
In one sense, the 2015 market collapse was the culmination of a trend that began in 2011, if not well before. From 2011 to 2014, commodity prices were on a fairly steady downward trajectory, as major producers of crude oil, iron ore, and other key commodities continued to pump out excess supplies, even in the face of slower demand growth. The International Monetary Fund estimates that global economic growth slowed from 3.4 percent in 2014 to 3.1 percent in 2015, as growth in China continued to decelerate. Despite that slowdown and the correction in China’s property market, cheap raw material prices and government stimulus measures encouraged excess Chinese output. For one example, China’s demand for steel fell 5 percent in 2015, to 672.3 million mt, but its steel production exceeded 800 million mt for the second year in a row, the World Steel Association (Brussels) reports. To make matters worse, as virgin material prices dropped last year, Chinese manufacturers of everything from steel to copper to plastic became less dependent on scrap despite their massive output.
Meanwhile, the disconnect widened between the overall performance of the U.S. economy and the health of the U.S. manufacturing and scrap sectors. Real U.S. GDP grew 2.4 percent in 2015, marking the sixth consecutive year of economic expansion, according to the U.S. Department of Commerce. At the same time, U.S. Department of Labor data show that average U.S. nonfarm payrolls rose nearly 230,000 each month in 2015, prompting the Federal Reserve to raise rates in December for the first time since 2006. Yet the employment data also show manufacturing-sector payrolls registered a net loss of 5,000 jobs in the second half of 2015. In the fourth quarter alone, U.S. industrial production declined 3.4 percent at a time when scrap prices were hitting bottom.
Combine the domestic manufacturing woes, stronger dollar, global deflationary pressure, and commodity market imbalances, throw in a host of logistical and regulatory hurdles, and it is no surprise many scrap industry participants view last year as a “perfect storm” and the worst in a generation. Scrap industry profit margins continued to evaporate in 2015, and a growing number of companies either idled capacity, merged with other operations, or closed their doors. On the bright side, companies that weathered the storm through gains in operational efficiency, safety, and quality positioned themselves well for the future. That’s the view from 30,000 feet. Here’s a look at what happened in seven key commodity markets.
Aluminum
Excess supply had a dampening effect on the prices of a range of nonferrous metals in 2015, and aluminum was no exception. Chinese aluminum production rose nearly 12 percent in 2015, to a record 31.7 million mt, even as the Chinese economy continued to cool, the International Aluminium Institute (London) reports. China’s excess aluminum production weighed heavily on global terminal and physical market prices last year. The LME official three-month aluminum asking price declined nearly 19 percent from the end of 2014 to the end of 2015, finishing last year at $1,513.50 a mt (68.7 cents a pound), even as aluminum stocks in LME warehouses declined by more than 1.3 million mt. It is unclear whether the LME stocks went to off-exchange warehouses or made their way into the physical market, but the drop in the U.S. Midwest physical market premium from 24 cents a pound in January to as low as 7 cents a pound in the second half of the year suggested a well-supplied market. As primary and secondary prices dropped, U.S. aluminum companies announced additional smelter and potline closures, resulting in a 6-percent drop in U.S. primary aluminum production last year despite higher domestic aluminum consumption.
Copper
Despite reports of more supportive global market fundamentals, copper prices slipped lower in 2015 as concerns about Chinese demand and weakness across the commodity spectrum weighed on red metal tags. According to figures from the International Copper Study Group (Lisbon, Portugal), global copper demand exceeded copper supply in 2015, resulting in a 65,000 mt deficit. Taking into account the estimated destocking at Chinese bonded warehouses, ICSG’s global refined copper deficit widened to nearly 170,000 mt last year, as Chinese apparent copper use increased 3 percent. Even in the face of destocking and a supply deficit, the LME official three-month asking price declined 25 percent across last year. From a monthly average high of $2.86 a pound in May, the LME price was down to $2.10 by December. Copper and brass scrap prices tracked refined copper prices lower, making a difficult domestic scrap supply environment even more challenging. Diminished overseas demand for copper scrap didn’t help matters. As China increasingly substituted mined and refined copper for scrap, U.S. copper scrap exports declined 9 percent by volume and 20 percent by value, marking the fourth consecutive year of declining U.S. exports of red-metal scrap, Census Bureau data indicate.
Iron and Steel
Along with plastic scrap, ferrous scrap prices had the worst price performance among the major secondary commodities in 2015. The monthly composite price for No. 1 HMS declined from $325.83 a gross ton in January to $150.17 in December 2015, Scrap Price Bulletin reports. Plunging iron ore prices, excess Chinese steel production, a stronger dollar (which encouraged steel imports and dampened scrap export demand), and falling U.S. steel mill capacity utilization rates all weighed on the market. According to the American Iron and Steel Institute (Washington, D.C.), U.S. steel mill capacity utilization rates slid from a high of 79 percent in January to less than 65 percent in December. Amid waning steel demand from the U.S. energy sector and continued competition from imported steel, U.S. steel production declined from 88.2 million mt in 2014 to 81 million mt in 2015, the U.S. Geological Survey estimates. The U.S. steel industry sought relief by filing antidumping trade cases against hot-rolled, cold-rolled, and coated steel imports. There was little relief in sight for recyclers, however, as ferrous scrap prices fell to post-recession lows in the fourth quarter of 2015, and ferrous scrap exports (excluding stainless and alloy steel scrap) plunged 16 percent, to less than 11.9 million mt.
Lead and Zinc
Although lead and zinc both registered global production surpluses in 2015, the sister metals had significantly different price performances. According to the International Lead and Zinc Study Group (Lisbon), world refined zinc production exceeded demand by 123,000 mt last year due to rising zinc production in Canada, China, India, and South Korea as well as a 4-percent decrease in U.S. zinc demand. Similarly, lead had a 63,000 mt surplus—despite an 8-percent reduction in world refined lead metal output—due to an 18-percent drop in Chinese lead demand and a 5-percent decline in U.S. demand, ILZSG reports. The LME official three-month lead asking price slipped just 3.7 percent in 2015, however—the smallest decline among the base metals. In contrast, the comparable zinc price dropped nearly 26 percent last year, the second-worst performance—behind nickel—of the major base metals. In addition to lower year-on-year U.S. exports of zinc scrap, the idling of Horsehead Holding’s zinc production facility in Mooresboro, N.C., and the company’s subsequent Chapter 11 filing further disrupted the domestic zinc market.
Nickel and Stainless Steel
U.S. stainless steel producers made 1.81 million mt of austenitic (nickel-bearing) stainless in 2015, up 8 percent from 2014 and 53 percent higher than the output of 1.18 million mt in 2009, U.S. Geological Survey data show. At the same time, U.S. consumption of purchased and home stainless steel scrap totaled 1.34 million mt last year, USGS estimates. Meanwhile, global production of austenitic stainless hit a record in 2015, as Chinese output rose to 17.6 million mt. But corporate earnings reports, stainless scrap industry sentiment, and nickel’s price performance paint a far less rosy picture than the official production statistics. Throughout 2015, the LME official three-month asking price for nickel plunged 42 percent, giving it the worst price performance among the major base metals. Outokumpu Stainless USA (Calvert, Ala.) reported that stainless steel shipments from its North American facilities declined 5.9 percent in 2015, to 509,000 mt (compared with a target output of 700,000 mt), prompting workforce reductions. As it did for other scrap commodities, export demand for U.S. stainless scrap declined again last year. According to Census Bureau trade data, U.S. shipments of stainless scrap fell 5 percent last year, to 520,000 mt—the lowest level since 2004.
Paper and Recovered Fiber
Although U.S. recovered paper market conditions were less than ideal in 2015, scrap paper prices held up better than most scrap metal and plastic prices last year. According to data from The Paper Stock Report (Strongsville, Ohio), annual composite prices for selected paper grades fell 10 percent, on average, as steady international demand helped underpin prices. U.S. exports of scrap paper were up about 2 percent by volume in 2015, to roughly 21.6 million tons—the highest volume since 2012. China was again the largest export customer last year, taking in 14.9 million tons, or nearly 70 percent of the total. Among the major grades, U.S. OCC exports increased 9 percent in 2015, to 10.6 million tons, while mixed paper shipments edged up 1 percent, to 4.7 million tons, according to Census Bureau data. Total domestic paper and paperboard production declined 1 percent in 2015, to 79 million tons, as paper production continued to trend lower while paperboard output rose 0.7 percent, the American Forest & Paper Association (Washington, D.C.) reports. The U.S. paper recovery rate, meanwhile, reached a record 66.8 percent in 2015, up 1.4 percentage points from the previous year, AF&PA says.
Joe Pickard is chief economist and director of commodities for ISRI.