By Joe Pickard and Bernie Lee
The global economy enjoyed widespread and synchronized growth last year, supporting commodity prices even in the face of mounting geopolitical, economic, and other risk factors. According to the International Monetary Fund, world economic output increased 3.8 percent in 2017, up from 3.2-percent growth the previous year. Aside from areas affected by conflict and natural disasters, virtually every corner of the globe enjoyed positive results, including 2.3-percent growth in the advanced economies and 4.8-percent growth in emerging markets and developing economies, the IMF estimates.
As global economic output accelerated, so did manufacturing output and demand for raw materials. Global manufacturing ended 2017 on a high note, with the JPMorgan Global Manufacturing Purchasing Managers’ Index advancing to 54.5 in December. (A score of 50 separates expansion from contraction, so any score over 50 is positive.) Those results prompted David Hensley, the bank’s director of global economic coordination, to note that “the performance of the global manufacturing sector continued to strengthen at the end of the year, with growth of output, new orders and employment reaching levels last achieved in early 2011.” For its part, U.S. industrial production—which traditionally correlates closely with scrap demand—increased 3.6 percent from December 2016 to December 2017, the Federal Reserve says.
For U.S. businesses, last year’s corporate tax cuts, regulatory rollbacks, rising stock valuations, and other developments boosted business sentiment. By the fourth quarter of 2017, the Business Roundtable’s CEO Survey indicated 76 percent of CEOs expected sales to increase in the next six months, 49 percent projected increased capital spending, and 43 percent expected to increase hiring. U.S. economic data reflected the improved business sentiment. By the end of 2017, initial unemployment claims dropped to the lowest levels in decades as labor market conditions improved. At the same time, the U.S. Bureau of Economic Analysis reported U.S. gross private domestic investment rose 3.3 percent in 2017 following a 1.6-percent contraction the prior year.
Rising investment flows also carried over to commodities, setting the stage for significant price gains. By December 2017 the total value of global commodity assets under management reached $311 billion, an increase of $45 billion compared with December 2016, Barclays says. Most nonferrous metal prices on the London Metal Exchange posted gains well into the double digits. The higher prices for primary commodities boosted interest in scrap. In 2017, the value of U.S. scrap exports rose 9 percent, year on year, to $17.9 billion thanks largely to higher demand from China (up 9 percent), Germany (up 86 percent), Turkey (up 48 percent), Vietnam (up 131 percent), Mexico (up 19 percent), and Canada (up 7 percent). The looming specter of trade protectionism, however, threatened to stem the rising tide of global trade and output, dividing business-sector interests along the way.
While U.S. steel and aluminum producers widely cheered the Trump administration’s Section 232 investigations into steel and aluminum imports on national security grounds, domestic consumers voiced stiff opposition to those actions. Similarly, the Section 301 investigation into Chinese technology transfer and intellectual property policies, the renegotiation of the North American Free Trade Agreement, and other trade policy developments received mixed responses from the U.S. business community. Then China’s notification to the World Trade Organization in July 2017 that it would ban imports of certain scrap commodities—including mixed paper and postconsumer plastic scrap—sent shock waves through the industry.
Subsequent developments in China, including lower scrap import quotas and stricter “carried waste” thresholds, raised concerns about China’s future as a scrap importer. Even though the paper and plastic markets bore the initial brunt of China’s policy changes, the writing was on the wall for nonferrous scrap and other recycled commodities, casting a shadow over scrap market sentiment late in the year despite the positive macroeconomic developments. This recap examines how Chinese policy changes and other key market developments affected the major scrap commodities last year.
Aluminum was squarely in the trade spotlight last year due to the U.S. government’s Section 232 investigation of aluminum imports and the resulting deterioration of trade relations with China. Excess aluminum production in China has been a recurring theme in recent years, and data from China’s National Bureau of Statistics showed its primary aluminum production rose 1.6 percent in 2017, to nearly 32.3 million mt. (Figures from the International Aluminium Institute—which include estimates of unreported Chinese production—show an even larger increase.) With mainland China the destination for 52 percent of U.S. aluminum scrap exports in 2017, aluminum recyclers were particularly exposed to changing Chinese import policies. Transportation bottlenecks also posed significant challenges for primary and secondary aluminum market participants last year, helping to boost the Midwest premium. Those same market conditions resulted in more imports of aluminum scrap into the United States, which grew 15 percent last year, to nearly 700,000 mt, based on U.S. Census Bureau data. While the LME average three-month aluminum price rose 23 percent last year, to around 90 cents a pound, the average price of old aluminum sheet and cast in the United States increased only 7 percent, to 59 cents a pound.
The copper market provided one of the clearest examples of the widening gulf between primary and secondary commodity prices last year, signaling the divergence between physical and investment demand. Apparent world use of refined copper inched up 0.7 percent last year, leaving a supply deficit of roughly 250,000 mt, the International Copper Study Group says. Meanwhile, the LME average three-month copper price surged 27 percent for the year, to $2.81 a pound ($6,193 a mt), peaking at $3.29 in late December. In comparison, the U.S. average discount for No. 2 copper scrap expanded to historically wide levels of more than 40 cents a pound in the fourth quarter, American Metal Market reports. Expectations of lower Chinese copper scrap demand also played a role in the price disparity between refined copper and copper scrap, even as U.S. exports of copper scrap to China improved last year. Those shipments to mainland China rose 4 percent, to more than 685,000 mt, as higher demand for bare bright and other high-quality copper scrap grades more than offset weaker interest in mixed copper and copper alloy scrap, Census Bureau data show.
Iron and Steel
Although logistical headaches and difficult labor market conditions continued to pose challenges, U.S. ferrous market participants enjoyed rising steel and scrap prices, higher domestic steel production, and stronger overseas scrap demand in 2017. U.S. ferrous scrap exports (excluding stainless steel and alloy steel scrap) had their best annual performance since 2014, rising 23 percent, year on year, to 13.8 million mt. Improved demand from Turkey (up 16 percent), Vietnam (up 93 percent), China (up 60 percent), Pakistan (up 65 percent), Bangladesh (up 111 percent), Mexico (up 12 percent), and others contributed to last year’s gains. On the domestic front, new policy initiatives on trade, taxes, and regulatory reform aligned with U.S. steelmakers’ policy playbook. U.S. steel mills shipped nearly 90.9 million tons of steel in 2017, a 5-percent increase over 2016, the American Iron and Steel Institute says. As expectations for enhanced protection from steel imports rose, domestic hot-rolled coil prices surged to around $650 a ton late in the year, and ferrous scrap prices followed suit. The average No. 1 HMS composite price climbed 36 percent in 2017, to $277 a gross ton, according to Scrap Price Bulletin.
Lead and Zinc
Zinc prices outperformed most other commodities last year, peaking at $1.50 a pound, or more than $3,300 a mt, in October. For the year, LME three-month zinc averaged $1.31 a pound, up 38 percent from the 2016 average. As it did with other commodities, China played an outsized role in the zinc market last year. According to Antaike Information Co., “China’s zinc and zinc alloy production dropped by 1.5 percent in 2017 to 4.73 million [mt] due to low processing fees, inadequate concentrate supply and the impact of strict environmental inspections.” Meanwhile, global refined zinc use increased 2.6 percent last year, the International Lead and Zinc Study Group says. As for lead, zinc’s sister metal, global refined use increased 2.3 percent in 2017, resulting in a 165,000 mt lead supply deficit, ILZSG reports. As lead inventories at the LME, Shanghai Futures Exchange, producers, and consumers decreased by 40,000 mt, the LME average three-month zinc price increased 24 percent, year on year, to $1.06 a pound, or $2,327 a mt. The rising lead prices likely contributed to the lead battery recycling rate of 99.3 percent, Battery Council International says.
Nickel and Stainless Steel
The United States produced roughly 2.8 million mt of stainless steel last year, the International Stainless Steel Forum reports, and that output level boosted domestic stainless steel scrap consumption. According to ISSF estimates and annual company reports, about 78 percent—or 2.15 million mt—of domestic stainless steel production comes from scrap, including 282,000 mt of imported stainless scrap. On the export side, the United States shipped 488,000 mt of stainless scrap last year, down 25 percent from 2016 due to weaker demand from China, Taiwan, Canada, India, South Korea, and Japan, according to Census Bureau data. Possible factors behind the softer export market include the relatively modest nickel price gains compared with other nonferrous metals and higher nickel pig iron production in China and Indonesia. World primary nickel use, meanwhile, increased from just over 2 million mt in 2016 to approximately 2.2 million mt last year, the International Nickel Study Group reports. The LME average three-month nickel price rose 8 percent, to $4.74 a pound, or just over $10,460 a mt, year on year.
Paper and Recovered Fiber
Average recovered paper prices in 2017 reached levels not seen in over five years, but market conditions diverged sharply between the first and second halves of the year. Rumors last spring about China’s planned policy changes regarding scrap imports and rejections of shipments at its ports had markets wavering over the summer. U.S. exports of recovered paper declined 7 percent last year, with high-grade deinking and news grades the only major bulk categories to post year-on-year export gains. China remained the largest international buyer of U.S. scrap paper overall, but India and Indonesia were the biggest markets for U.S. OCC in the later months of the year. U.S. market participants recovered 50.8 million tons of scrap paper from a supply of 77.3 million tons, yielding a recovery rate of 65.8 percent in 2017, the American Forest & Paper Association says. The U.S. paper and paperboard supply has been in gradual decline for the past 10 years while the recovered tonnage has remained relatively constant. While the amount of paper heading to landfills has decreased considerably in the past 20 years, the recovery rate has remained in a tight band from roughly 64 to 67 percent for the past nine years.
Joe Pickard is chief economist and director of commodities and Bernie Lee is commodities research analyst for ISRI.
Most commodity prices surged higher in 2017, but scrap commodities struggled to keep pace as protectionist trade measures and expectations for diminished Chinese import demand took a toll in the second half of the year.