ISRI Commodities Roundtable Forum Report: All Eyes (Still) on China

Oct 6, 2017, 20:43 PM
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November/December 2016


China continued to loom large in the market reports at ISRI’s Commodities Roundtable Forum, but it was far from the only factor giving recyclers pause as they contemplated the future.

By Kent Kiser

 

Although China has seen its economic boom fade in recent years, it remains the dominant factor in many commodity markets, and it was a near-constant presence in reports at ISRI’s annual Commodities Roundtable Forum, held Sept. 19–21 in Chicago. In talks on aluminum, copper, lead, nickel, steel, and zinc, China’s market impact figured prominently, proving it might be down, but it’s far from out. In addition to its huge appetite for and massive production of certain metals, China appears to be shifting to a more outwardly focused, internationally aggressive merger-and-acquisition force, with potentially monumental effects in some metal sectors. Beyond the talk of China, the tenor of the roundtable reports ranged from soberly realistic to mildly optimistic, depending on the commodity. To no one’s surprise, the reports affirmed the ongoing turbulence and uncertainty in virtually all scrap commodity markets, but there were just enough positive signs to give attendees cause for hope entering 2017.

The Big Picture

 

For the first time, the ISRI Commodities Roundtable Forum offered a special session on world markets that examined the international scrap trade, the state of key nonferrous metals, and U.S. government export assistance programs and resources.

Offering a sober look at global scrap trade, Joe Pickard, ISRI’s chief economist and director of commodities, noted that worldwide, scrap exports reached their peak in 2011, at nearly 210 million mt, but they have been declining ever since, totaling 190 million mt in 2015.

The world’s top three importers of ferrous scrap in 2015 were Turkey (16.3 million mt), India (6.7 million mt), and South Korea (5.8 million mt), while the top aluminum scrap importers were China (2.1 million mt), India (883,000 mt), and Germany (772,000 mt). The leading copper scrap buyers were China (3.7 million mt), Germany (589,000 mt), and Belgium (235,000 mt), Pickard noted.

India, Pakistan, and Mexico posted the greatest year-on-year gains in their ferrous scrap imports in 2015, while Germany, India, and Poland had the biggest gains in aluminum scrap imports, Pickard said.

Don Smale, secretary-general of the International Copper Study Group, International Nickel Study Group, and International Lead and Zinc Study Group, all based in Lisbon, Portugal, examined the global market prospects for those nonferrous metals.

Zinc has seen its prices rise 35 percent since the beginning of the year, thanks largely to significant production cuts, Smale said. The galvanized steel sector drives zinc demand, and the expected supply of zinc is not likely to meet the growth in demand, he said. Going forward, he added, the recovery of zinc from electric-arc-furnace dust is potentially one of the most dynamic supply sources.

As for lead, China is the source of almost all growth in lead use from 2000 to 2015, Smale said. Its consumption of refined lead has risen from a 20-percent share of world supply in 2005 to 38.5 percent in 2015, he noted. For this year, he said, lead is expected to end with a surplus of about 70,000 mt. (See Smale’s comments on copper and nickel in those sections below.)

On a positive note, Salim Bhabhrawala of the U.S. Department of Commerce’s International Trade Administration (Washington, D.C.) noted that there has been a global construction boom in the past five years, with the promise for “tremendous growth in the near future” for building products, which could bode well for scrap demand. The United States is competitive in the high-quality construction product market, with nonferrous metal building products alone representing a $14.8 billion market in 2015, he said. Bhabhrawala noted that no Middle Eastern country is in the top-10 list for U.S. metal exports, and he wondered if “it’s time to turn our attention to that area a little bit.” Saudi Arabia, Kuwait, and the United Arab Emirates are experiencing huge construction booms, and they have a taste for high-quality products, he said.

To help U.S. recyclers take advantage of export opportunities, the federal government offers a variety of programs and resources, Bhabhrawala said. The NEI NEXT program, for instance, has four objectives: identify potential global customers for U.S. companies; conduct trade promotion to increase the visibility of U.S. products in foreign markets; open new markets through trade policies; and help U.S. exporters obtain export financing. The U.S. government also produces the Top Markets Report, an annual series of free reports on different market sectors. “We have a ton of resources here and a lot of deliverables to help you, whether it’s market research, participation in trade missions, or enforcement of our trade laws,” he said.


Structural Issues Plague Ferrous Market

The Chinese market is “what everybody wants to talk about these days,” said Charles Bradford of
Bradford Research (New York) at the ferrous roundtable—and for good reason, given that China is the world’s largest steel producer. Although China’s reported steelmaking capacity is 1.2 billion mt, Bradford believes it’s closer to 900 million mt, asserting that “a lot of the excess steelmaking capacity in the world doesn’t exist. It’s fictitious.”

China’s steel consumption is heavily tied to its construction market, which is about 68 percent of its steel demand, as well as its growing automotive sector, which produced 17 million cars in the first eight months of 2016, Bradford said.

He did not expect any increase in China’s ferrous scrap demand. China won’t switch much of its steelmaking from ore-based basic oxygen furnaces to scrap-intensive electric-arc furnaces because its electricity is expensive, Bradford said. China could, however, start generating enough of its own ferrous scrap to affect the market. Although a country’s scrap availability usually increases 15 years after it industrializes, Chinese consumers likely will use their cars longer than average, so its ferrous scrap supplies might take longer to grow. Even so, “there could be a surge in Chinese scrap supplies in a couple of years,” he said.

Bradford pointed to two potential “black swan” events that could transform the Chinese market, with the first being the development of its shale gas reserves. Although China has done “almost nothing” to develop those reserves, it is starting to allow Western companies to explore the possibilities. If China expands its own energy supplies rather than importing so much from the Middle East and Russia, “potentially that could be a game-changer for China,” Bradford said.

The other black swan event could be a potential Chinese baby boom following the loosening of its one-child policy. Such a boom could “do wonders” for China’s economy, especially its consumer markets, he said.

Doug Kramer of Kramer Metals (Los Angeles) provided a snapshot of steel and ferrous scrap conditions on the U.S. West Coast. Beyond scrap prices, “the bigger issues confronting the industry are the lack of supply, the unprecedented ongoing restructuring of the scrap industry, and the growth of illegitimate, illegal, and undisciplined rogue scrap brokers and operators that have been popping up within our industry,” he said. He also emphasized the continuing flight of manufacturers from Western states—especially from California, where “extremely burdensome and high regulatory costs” and other factors are hindering manufacturers’ ability to do business. Those conditions are creating an “exodus of industry not seen since the 1980s,” Kramer said. To illustrate that point, he noted that only one ferrous scrap consumer—a small rebar mill—remains in California, which leaves the state’s recyclers with “no real good consumption options domestically.”

As a result, California ferrous recyclers must sell their scrap overseas, which has become more difficult due to poor market conditions. Ferrous scrap exports (excluding stainless and alloy scrap) from California have declined every year since 2011, from that year’s peak of 6.8 million mt to 3.6 million mt in 2015, Kramer said. Recyclers also face rising costs at West Coast ports. “It’s really an unregulated Wild West there,” he said.

The ferrous roundtable also included a look at the numerous antidumping and countervailing duty cases the U.S. steel industry has filed. U.S. steelmakers launched their latest efforts in June 2015 with a case on corrosion-resistant steel products, then a cold-rolled steel filing in July 2015, and a hot-rolled steel case in August 2015, noted Daniel Pickard of Wiley Rein (Washington, D.C.). Rather than filing against one or two countries, these were “major multinational, many-country cases,” he said. The cases have been “overwhelmingly successful,” in contrast with many failed cold-rolled and hot-rolled cases in the past, Pickard said. “These were major cases which, by and large, are providing meaningful relief to the domestic industry,” he noted. The U.S. steel industry also filed a case on cut-to-length steel plate in April 2016, which will be ongoing for several more months, and it filed a case on concrete reinforcing bar in September.

Although the above cases are important pieces of trade litigation, they won’t solve the steel industry’s “structural dysfunctions” regarding overcapacity, Pickard said. “Unless there’s something done in regard to the imbalance between supply and demand, we’re going to continue to see trade cases.”


Aluminum Market Awash in Metal

Talk of China also claimed a significant portion of the aluminum roundtable. China’s primary aluminum consumption increased strongly in the first half of 2016—about 7 percent, year on year—thanks to monetary stimulus from the Chinese government, reported Mike Southwood of CRU Group (Wexford, Pa.). There are signs, however, its consumption growth is slowing and will continue to ease—to 6.1 percent in the third quarter and 4.6 percent in the fourth quarter—as the stimulus effect wanes, he said.

At the same time, China’s primary aluminum production is expected to increase 4 percent in the third quarter and 11 percent in the fourth quarter, Southwood said. China has restarted 1.2 million mt of smelter capacity so far in 2016, and “the market remains awash with material as capacity continues to grow [there],” he said. Although the pace of China’s capacity growth will slow, its aluminum production capacity still will rise 3.9 million mt a year through 2020, outpacing its consumption growth. Overall, the Chinese market will have about a 250,000 mt surplus of primary aluminum in 2016—the smallest since 2007—but a projected larger surplus of 988,000 mt in 2017, he noted.

While China’s exports of aluminum have increased modestly in the first half of this year, at just under 5 percent, that pace will accelerate in the second half, and its net exports will continue to grow over the next five years, Southwood said.

U.S. exports of aluminum scrap to China grew at an annual compound growth rate of 13 percent from 2007 to 2011, he said. That trend reversed at virtually the same speed from 2011 to 2015. One reason for the decline is that China’s domestic supply of aluminum scrap has increased, with its obsolete scrap supply rising from 2.1 million mt in 2008 to 4.3 million mt in 2015, Southwood said.

One of the hottest China-related developments in the aluminum sector was Zhongwang USA’s bid to acquire Aleris Corp. in a $2.33 billion deal. The acquisition, Southwood said, would make Zhongwang one of the largest aluminum rolled-product producers outside of China. There’s “some nervousness” about the deal, however, because Zhongwang USA is a subsidiary of China-based Zhongwang International Group (Liaoning, China), owner of Zhongwang Holdings, which is accused of questionable practices involving aluminum extrusion imports and exports. “This is a very complicated situation, and it will be very interesting to watch what comes next,” he said.

The Zhongwang USA–Aleris deal could signal the start of a broader trend of Chinese companies acquiring more assets globally, particularly those serving the automotive and aerospace industries, Southwood said. Some companies in the aluminum market are vulnerable to a takeover, while others could desire a ready injection of capital or consider a sale to a large Chinese firm as their best option, he said. “They may follow the adage, ‘If you can’t beat them, join them.’”

Turning to the global aluminum market, Southwood noted that demand for semifinished aluminum products for the construction market will increase 4.2 percent in 2016 and 3.8 percent next year. The automotive market is showing even greater strength, with shipments of heat-treated rolled products up 20 percent in the first half of the year. Ford Motor Co.’s conversion of its super-duty truck line to aluminum and Novelis’ commissioning of a third sheet line at its Oswego, N.Y., facility could boost demand for auto body sheet in the second half of the year, with U.S. shipments of auto body sheet expected to show growth of 32.1 percent in 2016, to 460,000 mt, Southwood said. Going forward, more automotive conversions to aluminum—especially in front and trunk hoods, roofs, and doors—will add significant volume to the market, driving shipments of auto body sheet to the passenger car market upward at an 11-percent compounded growth rate until 2020, he said.

Overall, the global aluminum market will have a deficit of about 176,000 mt in 2016—the first since 2006. Subtracting China, the world will have a 524,000 mt deficit and North America will post a 2.5 million mt shortfall, Southwood said. In 2017, the global aluminum balance will return to a slight surplus of 259,000 mt; without China, it would have a world deficit of 729,000 mt and a North American deficit of 2.7 million mt.

As for prices, Southwood predicted a third-quarter 2016 price of $1,645 a mt, a fourth-quarter price of $1,550, and a three-month average of $1,573 for this year. In 2017, he said, aluminum could fall to $1,480 in the first quarter, $1,500 in the second quarter, and a three-month average of $1,565.

Bringing a scrap processor’s perspective to the aluminum roundtable, Larry Snyder of United Scrap Metal (Cicero, Ill.) said “demand for aluminum is going to be strong,” as the light metal makes gains in automotive and structural applications. Winter weather could affect aluminum scrap flows, and any declines in the ferrous market could further limit supplies because “there won’t be as much aluminum coming from shredders,” he said. Snyder summed up his advice for recyclers in one word—caution—and discouraged them from speculating on the market’s moves. “My philosophy has always been if you have more than a load, you have too much,” he said. “I turn our inventory two to three times a month. … The days of speculating are over.”

The aluminum roundtable also featured Frederick Penha of CME Group (New York), who reviewed CME’s aluminum futures contract options available to recyclers.


Supply Stymies Copper Prices

Given that China consumes about half of the world’s copper supplies each year, it’s no surprise it figured prominently in at least one presentation at the copper roundtable. Calling China the “premier price driver” in the copper market, Edward Meir of INTL FCStone (New York) noted that China “didn’t really fall apart” as many feared it would in 2016 because the government pumped credit into the economy. Although that stimulus has elevated China’s debt-to-GDP ratio to an “incredibly high” 250 percent, the country is starting to stabilize, with first-half 2016 GDP growth of about 6.7 percent, he said.

Buoyed by strength in its automotive, retail, and real estate sectors, China’s copper demand has been “reasonably OK,” Meir said, pointing to its higher imports of refined copper and concentrate, up about 20 and 35 percent, respectively, over last year. China is stepping up its imports of primary copper resources to meet physical demand but also for arbitrage opportunities, stockpiling, and financing purposes, he explained. In contrast, China’s imports of copper scrap are down about 10 percent in 2016.

Despite the improvement in China’s demand, copper prices haven’t rebounded significantly because “the supply side has more than kept up,” Meir said. Chilean copper mine production is down just 5 percent—to about 3.2 million mt through July—despite low prices and disruptions such as flooding and earthquakes. Peru’s mine production, meanwhile, has “really taken off,” rising 50 percent, to about 1.2 million mt. “Even the highest-cost mine producers have been making money,” Meir said. “That explains why we haven’t seen much of a supply retrenchment.” For the year, copper mine supply output will be up 2 to 3 percent, and the market will end 2016 with a surplus from 150,000 to 300,000 mt, he said.

In the world markets session, Smale of the ICSG said copper mine production totaled 19 million mt in 2015, while secondary production reached 3.9 million mt. Copper mine production has had an average annual growth rate of 3 percent since 2010, and while Chile is the world’s largest copper mine producer, with a 30-percent share of the market, China has been “the story” for the past two decades, currently accounting for 9 percent of production. World secondary copper output, meanwhile, has had an average annual growth rate of 4 percent since 2000, and it now represents about 17 percent of total refined production, Smale said.

Meir offered two sets of 2017 copper price forecasts. The Reuters consensus prices range from $4,190 to $5,750 a mt, with an average of $4,980 ($2.26 a pound), and the INTL FCStone prices range from $4,150 to $5,270 a mt, with an average of $4,520 ($2.05 a pound).

The two other copper roundtable speakers—Joseph Bernhardt of Aurubis Buffalo (Buffalo, N.Y.) and Chris Lewon of Utah Metal Works (Salt Lake City)—focused their comments on the shifting sources and supply of copper scrap. Recyclers used to source No. 2 copper, for instance, primarily from scrap wire and pipe/tube, but they now see it coming more from shredders and electronics recycling. While some automotive components—such as radiators—have become less copper-intensive over the years, cars have gained copper content overall, especially in their electronic elements. A typical car contained about 20 pounds of copper 20 years ago, but now it contains 55 pounds, Bernhardt said. Copper also has enjoyed growth in electronics such as smartphones and tablets. Although the amount of copper per device is shrinking—in part due to miniaturization—“there are more devices getting into more hands worldwide because of globalization and the growing middle classes in undeveloped countries,” he said. As metal-containing products get more complex, recycling technology must adapt, especially given that some of the elements are potentially toxic if handled incorrectly, he said.

From his viewpoint as a recycler, Lewon noted a steady reduction of scrap flows in the past two years, which has created a “very tough environment” for processors. Part of the supply crunch stems from diminished U.S. manufacturing. Going forward, he doesn’t expect flows to change drastically up or down. The U.S. automotive industry is “the last bastion of hope” to boost the scrap market, Lewon said, as the market approaches the 17 million car production figure. He worried, however, whether the auto industry is “taking sales from future years and trying to bring them forward by offering discounts and incentives.”

More Optimism for Nickel

There are “a lot more reasons to be optimistic” about nickel, said Barry Jackson of Anglo American (London) at the nickel/stainless roundtable.

In the world markets session, Smale pointed out that world consumption of primary nickel has been growing steadily in 2016, with about 4-percent growth expected for the year, and global production of primary nickel has been declining since 2014.

The nickel supply deficit was 40,000 mt in the first half of 2016, Jackson said. Global nickel demand outpaced supply in that period, said Mu Li of CPM Group (New York), with nickel consumption growth concentrated in China, which consumed 100,000 mt more nickel than in the same time frame in 2015. China consumed much of that nickel in its production of stainless steel, which was up about 9 percent by midyear. Overall, global stainless steel production growth remains steady, with expectations that second-quarter 2016 production would be stronger than first-quarter production, Li said.

Both Li and Smale noted that China’s production of nickel pig iron has declined due to lower availability of nickel-bearing ore from the Philippines and Indonesia. As China’s ore imports slid 24 percent from January to July, its imports of other nickel resources surged, including a 72-percent increase in cathode and a 46-percent rise in ferronickel, Li said. China also has been drawing down its stockpile of nickel laterite ore to compensate for the lost ore supplies, she noted.

Exchange inventories of nickel remained elevated through mid-September, with London Metal Exchange stocks exceeding more than nine weeks of consumption, Li said. Jackson also pointed out that nickel stocks have shifted to China, where “financing” has become a large nickel “consumer.”

Going forward, global stainless production is expected to grow 4.7 percent in 2016 and 2.8 percent in 2017, Jackson said. As for the metal’s market balance, nickel could see a 57,000 mt deficit in 2016, rising to 215,000 mt in 2017 and tapering to 151,000 mt in 2018, he said. INSG projects a 2016 year-end nickel deficit of 50,000 mt, Smale said. Looking at prices, Li said nickel could range from $9,000 to $11,000 a mt for 2016.

In the scrap arena, the tighter supply of stainless scrap has given further support to nickel prices. After a tough start to 2016 for stainless and alloy recyclers, the ferrous market pickup earlier in the year and an antidumping win for U.S. stainless producers helped boost the market in May, June, and July, said Steve Jones of Allied Alloys Midwest (LaGrange, Ky.). Nickel stocks started flowing in August and September, however, tempering the market. Given the market uncertainty during the U.S. election cycle and China’s questionable economic health, “the fourth quarter will not be good,” Jones predicted.

Kent Kiser is publisher of Scrap and assistant vice president of industry communications for ISRI.

[SIDEBAR]

Assessing Plastic Recycling Opportunities

The U.S. plastic recycling market has grown from just shy of 2 billion pounds in 2009 to more than 3.5 billion pounds in 2014, while the export market has remained constant in that period, said Tonya Randell of Moore Recycling Associates (Sonoma, Calif.) at the plastics roundtable. While there are business opportunities in plastic recycling, Randell cautioned that newcomers must understand that plastics vary considerably in their polymer types and physical characteristics, such as flow rates. Recyclers interested in handling plastics must truly know the incoming material, including the quantity, potential contaminants in the stream, whether the material is from a post­industrial or postconsumer/commercial source, and whether it is a multi­layered, multi-material, cross-linked, or engineered plastic.

To maximize the material’s value, recyclers must learn how to separate the different types and grades, such as bottles, rigids, and film, Randell said. On the selling side, recyclers must identify a market for the material—which includes knowing whether it is more of an export or domestic grade—and know the grade specifications. “Knowing what your individual buyers want is the most important spec,” she asserted.

Newcomers also must understand that the plastics reclamation business model currently is “tenuous,” with limited access to capital, and most orders are month to month, which hinders the development of long-term relationships between buyer and seller, Randell said. Other challenging factors include direct competition from virgin resin producers, no clear public policy on the use of recycled postconsumer resin, and inconsistent support from converters and brand owners.

Factors that influence the plastic recycling market include the prices of natural gas, petroleum, and derivatives; the available production capacity of both virgin resin and recycled resin relative to demand; and the supply of industrial scrap or off-spec material, which can suppress prices, Randell said.

She encouraged recyclers to look at their current scrap suppliers for potential plastic recycling opportunities. “Your existing customers may be struggling to find outlets to recycle valuable plastic commodities,” she said. Helping suppliers divert more material from disposal can reduce their waste management costs and give recyclers a foothold in the plastic recycling niche.

 

 

China continued to loom large in the market reports at ISRI’s Commodities Roundtable Forum, but it was far from the only factor giving recyclers pause as they contemplated the future. 
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