NEW YORK The U.S. ferrous scrap export market is likely to perform better this year as confidence in the economies of China, Europe and the United States improves, according to Schnitzer Steel Industries Inc.s top executive.
Tamara Lundgren, president and chief executive officer of the Portland, Ore.-based company, said Schnitzer sees potential for a better export market in 2013 based on key macroeconomic trends.
"You see China coming up stronger. You see their new administration having made positive comments regarding the source of their growth, driving from urbanization and infrastructure investment. You see iron ore prices improving," she told analysts during an earnings conference call, noting that China played a significant role in driving the arbitrage between iron ore and scrap prices.
"You see Europe stabilizing, and that has knock-on effects obviously throughout the world. The U.S., while it remains to be seen, should be on a recovery path over the course of 2013," Lundgren said. "All of that should lead to a rising price environment, which is what we are beginning to see now ... but these issues remain to be seen and the stability that could appear remains to be seen."
The company has already begun to see some improvement in demand and pricing in both the ferrous and nonferrous markets.
"Some of that is seasonal, as winter weather may drop its character and drive prices higher, and some of that relates to recovery in iron ore prices and the infrastructure commitments in China. However, customer inventories are still at low levels," Lundgren said. "One of the indicators of the return of private-sector confidence will be higher customer inventory levels, which should also reduce some of the price volatility that we have been seeing so much of."
Lundgren noted that her views were not based on the current rebound in iron ore prices, which have strong, longer-term correlations with scrap prices. "Its really the modestly improving trends that we are seeing now and the fact that there is a potential for improvement this year vs. 2012," she said.
Lundgren said the arbitrage between iron ore and scrap prices was fueled by a significant drop in Chinese intake of scrap as consumers increased their use of iron ore over the past 10 months. However, conditions could improve as the market sees more Chinese players increase their use of scrap in blast furnaces due to government policies on the environment and electricity costs.
Schnitzer anticipates longer-term growth from such export markets as China, India, Turkey and elsewhere in Asia, Lundgren added.
Asked if a possible increase in direct-reduced iron (DRI) supply could impact scrap, Lundgren said the overall impact of more DRI use would be a net positive for the scrap industry. "In the narrow sense, DRI may impact the pricing of prime scrap by affecting the premium that prime scrap has historically received. But in a larger sense, DRI should be very positive for the scrap industry," she said. "The business case for DRI is predicated on low and stable natural gas prices. And if this assumption of low and stable natural gas prices proves true, then there should be a big step up in demand for steel generally."