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The five-year itch: Scrap market angst continues

Feb 28, 2014 | 08:00 PM | Bill Beck

Tags  ISRI, Institute of Scrap Recycling Industries, Great Recession, No. 1 Busheling, shredded scrap, No.1 heavy melt, No. 1 dealer bundles, Metal Bulletin Research Charles Bradford

A complete recovery for the ferrous scrap industry is on the way--it’s just a matter of how, when and how much.

Although that analysis sounds as though it could have been ripped from today’s headlines, it was actually the message at the Institute of Scrap Recycling Industries’ annual convention five years ago. Scrap prices had fallen about 13 percent in April 2009--the third consecutive month of decreases--to the lowest level since the previous November, when the crater of the Wall Street crash reached its nadir. In fact, April 2009 prices were the lowest in four years (other than those late-2008 and early-2009 markets).

“The collapse in the scrap market and in the overall economy were nearly simultaneous in the recessionary period of the fall of 2008,” a Midwest mill scrap buyer said. “In the wake of this, vast changes took place in pricing, and the immediate effect was traumatic. That fall off that fast in scrap prices was unprecedented.

“Over the past five years, while it’s true that prices have recovered dramatically and are at fairly consistently high levels, it also has been a new feature of the scrap market to be increasingly volatile,” he said. “From a mill perspective, the past five years have been about trying to control raw material costs so we don’t have steep drops in profits. That has meant more uncertainty down the chain, and I can tell you that is something I hear a lot about from the folks we buy scrap from.”

So even though prices for ferrous scrap are about three times higher today than they were five years ago, one similar question from 2009 will remain when attendees gather in Las Vegas the week of April 6 for ISRI’s annual convention: What’s the outlook for the industry as the economy still wrestles with a full-blooded recovery?

“Despite all of the volatility in domestic and global scrap markets, the outlook for the sector remains positive as the demand for scrap metal will grow among consumers,” an analyst with a U.S.-based investment banking firm said. “Improving economic conditions and demand from developing countries will continue to drive the growth in the scrap metal sector. These trends are important to consider in maximizing the value of a business in this sector.”

The long-term numbers bear that out, although more recent figures call it into question. Mill and export demand was on an almost steady increase from 2009 to 2011, and scrap prices moved up along with them. But mill demand for scrap and ferrous exports declined in 2012--the first time since the start of the Great Recession--and did so again last year. In addition, overall average ferrous scrap prices fell in 2012 and 2013 after reaching new heights in 2011.

“The biggest issue in scrap today is the humongous conflict of interest in the mills. They bought scrap companies to get low-cost inputs, but because the integrated companies have higher fixed costs that is now imposed on the scrap operations,” Charles Bradford, principal of New York-based Bradford Research Inc., said in discussing some fundamental changes over the past five years.

Many on the scrap side of the equation said they still head into this year’s ISRI conference with some wind at their backs.

“When nonresidential construction kicks back in, the demand for steel will increase and there could be a real shortage of scrap,” a Pittsburgh scrap source said recently. New housing construction starts were a bright spot in 2013 and are expected to remain on an upward course.

“The economy is improving at a slow but steady pace, so demand continues to slowly improve,” a Midwest scrap broker said earlier this year.

Indeed, U.S. crude steel production will increase 4 percent this year to about 90.5 million tonnes from 87 million tonnes in 2013, boosted by increased demand for industrial production and housing starts, according to Metal Bulletin Research (MBR).

Ferrous scrap demand will climb nearly 7 percent to 64 million tonnes in 2014 from about 60 million tonnes last year, MBR metals analyst Brad MacAulay told attendees at AMM’s 19th Annual Mexican Steel Forum in Cancun earlier this year. “U.S. scrap consumption will increase at a faster pace than crude steel output owing to higher capacity utilization rates at electric-arc furnace steel mills,” he said.

Increased demand also is seen offering some support to iron metallics prices, although expectations of lower global iron ore prices in 2014 will counter some of the increase in crude steel output putting pressure on metallics prices at the margin, according to MacAulay.

All of these sentiments sound similar to what was being said in April 2009, three months after President Obama was inaugurated amid the worst economic conditions since Franklin Roosevelt began his first term in March 1933. Those who had held out hope that the market would bounce back sooner rather than later were quickly disabused of that notion, however.

Although no consensus on the nature of a recovery was reached, all experts at the ISRI convention five years ago agreed that increases in domestic steel mill orders and overseas scrap demand were needed. And both were expected to bounce back; it was just a matter of when, they said.

There were predictions of a quick upturn in orders, a fast depletion of inventory, boosts from the newly minted government stimulus package, a growing strength in the automotive sector, and the mitigating effects of a healthier export market.

Many of those viewpoints were more or less correct, and are still often heard today, five years later. Some sunlight did start breaking through in the months following the 2009 ISRI convention: Export demand finally jump-started the long-awaited rebound in the domestic scrap market, the automotive sector began a post-recessionary growth period and the stimulus package had some positive, if limited, effect.

But still, at the time, many regions were awash in scrap. Mills across the Midwest had shut down early for the 2008 Christmas holiday and remained down until well after the first of the year.“We’re battening down the hatches for 2009. It’s very frightening,” one broker said in late 2008. The opening of the annual North American International Auto Show in Detroit in January 2009 coincided with reports that Auburn Hills, Mich.-based Chrysler Group LLC was on the verge of running out of cash, even with the bailout from the federal government. And reports that North American auto sales wouldn’t top 10 million vehicles in 2009 were absolutely frightening, given that Detroit’s automakers were driven to the wall on sales of 13 million vehicles in 2008.

Steelmakers announced lengthy closures for mills that had been running flat out only six months earlier. Cancellations of big orders from automakers and durable goods manufacturers became commonplace. Steelmakers were an afterthought in Washington, where the lion’s share of the recovery effort seemed to be directed at bailing out banks and brokerage houses.

Hopes that Obama would push for a “Buy American” clause for infrastructure projects funded by the proposed federal stimulus package were tempered by the realization that “shovel-ready” municipal projects almost always had a host of regulatory hoops to jump through before they become reality. “Most of these infrastructure projects that folks are pinning their hopes on probably won’t begin to create substantial numbers of jobs until 2010, or maybe later,” one Midwest broker said at the time.

There was just no business. “January to January,” an Ohio broker said, “our intake accounts are off 50, 60, 70 percent. But then again, I can’t sell what I’m getting in. It is just brutal out there.”

U.S. Steel Corp.’s Great Lakes Works in Ecorse, Mich., Gerdau Long Steel North America’s bar mill in Jackson, Mich., and ArcelorMittal USA LLC’s Cleveland Works were shut indefinitely. North Star BlueScope Steel LLC, Delta, Ohio, Steel Dynamics Inc.’s Roanoke Bar division in Roanoke, Va., and Dearborn, Mich.-based Severstal North America Inc. were running at sharply reduced operating rates and making only limited scrap buys. Gerdau’s Monroe, Mich., mill was down from late February until early April.

Scrap buyers, brokers and dealers kept telling themselves things couldn’t get any worse. But they did. By April, the markets were off another $40 to $50 per ton for a cumulative total of $110 to $120 since late January. Demand was so slow that scrap dealers could hardly give material away. By April, several thousand tons was considered a big sale in most of the United States east of the Rocky Mountains. “There’s a little bit of activity out there,” one East Coast buyer said in early April. “Unfortunately, it’s all down.”

Exports were the one bright spot in an otherwise relentlessly gloomy price environment. Turkey, which supplied much of the steel used in Saudi Arabia and Persian Gulf construction projects, began to book more cargoes off the U.S. East Coast, and buyers in India increased their purchases of containerized scrap. One broker noted that “inventory is so far down all over the world that once something kicks loose, you’ll see a spike in prices. Nobody has any material, so when a mill at 45-percent capacity goes even to 55-percent capacity, there’s going to be a lot of demand.” Another buyer noted that “without the exporters, prices would be off $50 and more everywhere in North America. The only thing that has happened in this market is that export demand has put a floor on pricing.”

Scrap prices actually increased $40 to $60 per ton from the Great Lakes to the Atlantic Ocean. Dealers in every scrap market in North America were shipping material to the nearest port for bulk export or for stuffing into containers for shipment to China, India or Turkey. Domestic mills were forced to match export prices if they wanted to bring scrap into their yards. And with much of the Big Three automotive industry shutting down for the summer, there was the threat of real shortages of prompt industrial scrap. “There’s no demand at the domestic mills,” one northern Ohio broker said at the time, “but there’s sure no supply either for the next 60 to 90 days.”

Ferrous scrap began to claw its way back in the summer and fall of 2009. Supplies of prime grades in all major markets had been shrinking since early spring, and price increases of $50 to $75 per ton were common in July 2009. “People heard some of the early numbers, with rumors that busheling was up $100, and the mills started buying,” one Michigan broker said. “As a result, dealers moved a lot of material in July.”

But perhaps the biggest factor in the recovery was the continuing strength of the export market. U.S. exports ended 2009 nearly 1 million tons ahead of the nearly 21.47 million tons shipped abroad the previous year. The increase in exports was perhaps counterintuitive, but explained by several converging phenomena. For one, all of the new mills coming online in China were producing steel in electric-arc furnaces, generating a continuing demand for ferrous scrap in the Far East. As a result, China dramatically increased its consumption of U.S. scrap in 2009. Russia, which had long supplied scrap to consumers in Europe and Turkey, tightened its exports, leaving those markets more open to shipments from the United States. And finally, low prices in the United States and a dramatic decline in the value of the U.S. dollar, especially vs. the euro, made U.S. ferrous scrap much more attractive to foreign buyers.

The recovery was well on its way by 2010. The year started out strong, and prime grades recovered all--and more--of the drop that had been recorded in 2009. U.S. vehicle sales began their long slog back from the pit of 2009, and as more cars and light trucks hit the road, order books at flat-rolled mills ticked upward. The market was in essential balance through much of 2011, the year in which calm finally returned to the nation’s ferrous scrap market. Prices for many of the bellwether grades in the most active markets traded for the year at just a $20 spread between highs and lows, a remarkable stability compared with the wild swings of the recent past, in which markets moved up or down by $50, $60 or even $100 per ton month to month.

The events of late 2008 and all of 2009 eventually receded into the past. But those in the ferrous scrap industry who lived through the Great Recession likely will never forget one of the most tumultuous rides in the industry’s history, especially as they head to this year’s ISRI convention with many similar questions still on their minds.

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