This article with the headline 'Coming to terms' is featured in the March/April issue of American Metal Market Magazine, which will reach subscribers in early April.
With President Obama still in the first 100 days of his second term, caution remains the default frame of mind for many in the ferrous scrap world as players look for bright spots in what they see as an otherwise unclear political environment.
I dont think the next few years are going to be good at all. We were looking at buying a new scrap shear and replacing a few of our older material handlers, but that has been put on the back burner for now, one southern dealer said in a post to AMMs website shortly after Obamas re-election. Peddler traffic is about nonexistent and we are seeing a slowing on the industrial side.
But if the history of the past century is any clue as far as ferrous scrap is concerned, there could be good news in terms of pricing. Past presidential performances and other political factors strongly suggest that scrap prices will rise noticeably during Obamas second term. (All scrap value comparisons in this article are based on AMMs reported annual averages for No. 1 heavy melting scrap delivered to consumers in Chicago, Philadelphia and Pittsburgh between 1913 and 2012.)
On average since 1913, presidential second terms have produced gains of 28.4 percent in scrap value over the price levels seen during the final year of a first term. Here are presidents who served second terms, along with their results:
-- Woodrow Wilson: +91.1
-- Calvin Coolidge: -14.2
-- Franklin D. Roosevelt: +41.4
(3rd term vs. 2nd term) +15.7
-- Harry S. Truman: +26.9
-- Dwight D. Eisenhower: -3.7
-- Lyndon B. Johnson: -18.8
-- Richard M. Nixon: +125.8
-- Ronald Reagan: +6.6
-- Bill Clinton: -25.4
-- George W. Bush: +66.7
(Coolidge took office in August 1923 for a partial term and was elected in 1924; Roosevelts first term was 1933 to 1937, his second term was 1937 to 1941 and his third term was 1941 to 1945; Truman took office in April 1945 for a partial term and was elected in 1948; Johnson took office in November 1963 for a partial term and was elected in 1964; Nixons second term ended early in August 1974.)
Limiting the comparison only to those presidents who saw scrap values gain during their second term, that average was an even-higher 53.5-percent increase, so Obama has historical precedent on his side.
Another element working in Obamas favor is party. Democratic presidents historically have been much more likely than Republicans to see scrap prices rise during their overall terms. In fact, Democratic administrations historically have seen annual scrap prices rise an average of 31 percent vs. about 18 percent for Republican presidents, although Republican presidents have tended to do better in second terms.
Finally, congressional makeup also plays a role. The most successful years for scrap price increases have come under Democratic control, with average gains of 49 percent, while under Republican control the gains have averaged 36 percent. But when control of Congress is split, as is the case now, prices tend to rise only about 2 percent on average, so this is one factor that could mitigate the movement of scrap prices over at least the next two years. However, when a Democratic president faces a mixed Congress, gains still average 37 percent as opposed to average losses of 16 percent when Republican presidents face mixed control of Congress.
Taking all of these factors into account--historical second-term performances, Democratic White House administrations and Democratic presidents working with split congressional control--points to the likelihood of gains in scrap value over the next four years. And while these numbers are correlative and dont necessarily denote causation, the relationship of scrap to general economic health does play an important role.
But none of this exists in a vacuum, of course. The fate of scrap prices is tied inexorably to the health of the steel sector. Three main concerns are on the minds of the President, the nation and the metals industry: How much positive influence the administration had on the overall economy, how much more of an impact can it have in the next four years and what is the relationship of the first two to metals health.
If (the) pace of manufacturing job growth (persists) in President Obamas second term, well be on track to add 1.2 million manufacturing jobs--easily surpassing his goal of 1 million new manufacturing jobs, Alliance for American Manufacturing executive director Scott Paul said earlier this year.
Others agreed. The fact is that when I look at where my business and my industry is as opposed to four years ago, things are significantly better, a source at one service center said. It might not be under the leadership that people are happy with, but clearly things are moving in the right direction. I do think this will help the metals industry in the long term.
A steel trader remained cautious, but indicated that the worst of the recession might be over. I think the economy is continuing to heal and continuing to get better. With it, steel demand should also get better, he said.
For others in the industry, that hopeful element is missing.
I hate to be too dramatic, but nothing that comes out of Obama is good for steel. Theres a lot of steel that goes into the coal business ... and Obamas view of the automotive business doesnt really include the steel industry either. ... Im not very optimistic, Gary Stein, president of Triple-S Steel Supply Co., Houston, told AMM after the election.
We are now seeing the bottom of a cycle of scrap turnover of durable goods that is a direct result of the limited production of goods during and after the great recession of 2008, a scrap source said. There were far fewer goods produced in 2008, 2009 and 2010 which are now turning over as scrap. In addition, the Cash for Clunkers program took almost 1 million autos out of the loop. As production ramped up in the past several years to near-pre-recession levels, the durable goods produced in 2010, 2011 and 2012 will start to slowly increase scrap levels in future years.
Another scrap source sees dire times ahead. I see too much demolition going on in the short term, which will dry up the supply for later years and drive prices higher. ... The reality is that demolition is one of the largest single sources of scrap--almost as great right now as peddler and auto salvage combined. While all the talk (is) about shredders and peddlers, the demolition business has been booming and the end of the boom is within sight. When this happens, I estimate 20 percent of the current flow will be gone, he said.
The only continued boom will be two to three years of scrapping infrastructure from the coal industry, which the (Obama) administration has literally demolished, he said. Small and midsized demo guys will start starving on the scrap by the end of 2013, while large firms will be OK for two to three years on these coal plants, unless real estate dramatically picks up.
With 35 to 40 percent of the scrap supply originating from demolition jobs, the industry needs to take notice, he added.
Yet early on in Obamas second term, industry observers have seen signs for hope.
We are pleased that the President seems to recognize the contributions of manufacturers like our nations steel industry to a strong economy. And we were encouraged to hear him talk about the importance of growing manufacturing, enhancing our infrastructure and promoting fair trade, Thomas J. Gibson, president and chief executive officer of the American Iron and Steel Institute, said in a statement following Februarys State of the Union address. However, he didnt provide many specifics about how his administration is going to do those things. The speech was a mixed bag of admirable goals with uncertain outcomes, and was missing some important details.
The Steel Manufacturers Association also responded positively to the Presidents plans for manufacturing, which included launching new manufacturing hubs and revamping the nations aging infrastructure. We fully support the objectives of a manufacturing resurgence, Adam Parr, the associations director of policy and communications, told AMM. Domestic steelmakers are competitive and supportive of (the Presidents) pro-growth objectives.
But some doubts remain about the near-term political situation. The Presidents State of the Union address and comments by Sen. (Marco) Rubio (R., Fla.) regrettably showed how entrenched both sides have become, Parr said. There are dueling messages. This is problem No. 1.