Countries that use export taxes to hoard raw materials are disruptive to international trade, and the consequences worsen when a government can adjust them easily, reacting to short-term market conditions, one analyst said.
"A lot of damage is done when those taxes go down and up. It makes for an extraordinarily volatile situation," Michelle Applebaum, managing director of Michelle Applebaum Research Inc., Chicago, said, commenting on the American Scrap Coalition (ASC) campaign against trade barriers involving ferrous scrap.
The ASC's beef isn't that other countries impede U.S. scrap exports—just the opposite. The issue is whether, for instance, India's 15-percent export tax causes Turkish mills to source scrap from the United States when, in a freer market, the source for such metallic units might be India.
Applebaum assumes the arena for knocking down such barriers will be the World Trade Organization (WTO). "I think we're going to have to make a lot of noise. It's at least as inflationary on steel as on steel raw materials," she said. In a commentary earlier this year, she labeled such taxes form of "reverse protectionism."
"Russia has made it clear on the world market that they view scrap as a strategic resource, something that's necessary to support the re-industrialization of the Russian economy, so their scrap has become less available," said Mark Parr, steel industry analyst at KeyBanc Capital Markets Inc., Cleveland.
The broader context is steep growth in world steel production during the past five to 10 years, which has strained supplies of many steelmaking raw materials, he said. Scrap is just one part of that picture.
The nature of scrap supply, particularly obsolete scrap, obliges developing countries to source their recyclables from the mature industrial countries, Parr said. The flow depends on how many vehicles were sold 10 years ago and refrigerators 20 years ago. The weak U.S. dollar makes the United States a particularly attractive source, he noted.
Setbacks to U.S. manufacturing might lead to reduced availability of industrial scrap, Parr allowed, but he doesn't see that as an imminent threat.
"For the time being, the U.S. will remain a very scrap-rich environment," Parr said, but there will be increased world demand for U.S. recyclables. "When exports are growing as rapidly as they have in the past five years, the magnitude of excess scrap available to U.S. producers is reduced."
Increased concern over the sourcing of metallic units has prompted mills to integrate vertically, Parr said. Electric furnace steelmakers have acquired large scrap companies and integrated producers have invested in facilities making iron ore pellets.
"When I see the U.S. being a willing supplier of scrap into the global market, it feels like we're becoming a developing economy. That scrap is going to get turned into steel that will find its way into products for our Wal-Marts and Home Depots and K-Marts," he said. "Wouldn't it make more sense for U.S. industry to export more steel as opposed to exporting scrap?"
The Chinese government, faced with similar trends, would be much more upset than the U.S. government seems to be, he said.
"China is really not interested in exporting raw materials to somebody that can turn around and compete with them. From a pure economic perspective, it would be better for our economy perhaps if instead of exporting the scrap to others we'd convert more of it here to steel and ship steel instead of scrap," Parr said, adding that the United States has some competitive advantages in steelmaking, particularly the abundance of coal-based electricity.
Parr said he isn't in a position to offer policy prescriptions. "It doesn't surprise me that there's increasing interest in monitoring the outflow of scrap, given the strength of our steelmaking industry right now," he said. However, "I'm not aware of any scrap shortages. I'm not aware of anybody saying publicly 'we can't find scrap.' People have been able to get supply, but clearly they've had to pay a high price for it."
The ASC agenda is viewed more skeptically by Charles Bradford, president of Bradford Research/Soleil Securities Inc. in New York.
"Going back decades, people like Ken Iverson (of Nucor Corp., Charlotte, N.C.) were always very up-front in saying that higher scrap prices meant higher earnings. Yet the premise of the (ASC) approach is to get the price down," he said. In any event, he noted, by September market pressures were bringing the price down without political intervention.
The tricky part for mini-mills is that the 2008 price trajectory of prime scrap eliminated and then reversed the price advantage of electric furnaces over integrated mills in making flat-rolled steel, assuming prime scrap to be 50 percent of the mini-mills' metallics intake, Bradford said. However, the subsequent price fall in scrap could restore the previous state of affairs—and integrated steelmakers might even face higher costs from the next President's agenda on penalizing carbon emissions.
"The price of scrap is determined by the demand for steel. When demand for steel is good, mills buy more scrap, the price of steel goes up, and margins expand," Bradford said. "There's lots of historical evidence going back a long time."
The U.S. availability of prime ferrous scrap grades—No. 1 bundles and No. 1 busheling—might be impaired if the dollar continues to strengthen and U.S. manufacturing plants become less competitive and have to throttle back, he said. "There is a problem of prime scrap supply."
But scrap substitutes may be able to take up the slack. A prime example is Steel Dynamics Inc.'s Hoyt Lakes, Minn., project, which is keyed toproduce iron nuggets from low-grade ore. "If SDI can make a product better than prime scrap at a cost below where prime scrap is currently selling, the way they say they can, the profitability of this stuff is going to be phenomenal," Bradford said. PAUL SCHAFFER