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Uncertainty rules scrap after Great Recession

Keywords: Tags  ferrous scrap, ferrous scrap prices, Aldo Mazzaferro, Goldman Sachs & Co., no. 1 heavy melting scrap, ferrous scrap prices, Eric Glover, Canaccord Adams Inc. Institute of Scrap Recycling Industries


No one saw it coming, or at least said nothing about it at the time. Five years ago, as more than 5,700 attendees gathered in Las Vegas for the Institute of Scrap Recycling Industries’ 2008 annual convention, scrap prices stood at near-record highs, with even higher levels yet to come over the next four months. The boom seemed unstoppable.

Scrap prices had been on a bullish ride since 2004, the first year that prices consistently hit the $200- and $300-per-ton levels for obsolete and prime scrap, respectively, over a sustained period. Although that trend cooled a bit at times over the next two years, by 2007 the boom was back in full force and that momentum carried over into the first quarter of 2008.

Scrap players heard strong, confident messages during the 2008 conference, according to ISRI’s Scrap magazine. “The booming steel market appears ‘quite sustainable,’ ” Aldo Mazzaferro, analyst at New York-based Goldman Sachs & Co., said in the May/June 2008 edition. “Scrap prices, meanwhile, could climb even higher on the back of already strong global demand that will only intensify as electric-arc furnace capacity grows.”

“The average price for No. 1 (heavy melting scrap) has increased 240 percent since 2000,” Eric Glover, equities analyst at San Francisco-based Canaccord Adams Inc., said in the May/June edition, asserting that the “days of cheap scrap are long gone.” He projected a new “higher pricing floor of $300 a gross ton,” noting that while “volatility will continue, prices will continue to march higher.”

All of that was before the bursting of the housing bubble became apparent and the economy crashed. Scrap prices dropped, as did attendance at ISRI’s April 2009 convention to 4,300. As it turned out, the convention was held just on the other side of the depths of the Great Recession for the scrap industry, as demand and prices were about to start a noticeable, if at times inconsistent, recovery.

And now, on the eve of ISRI’s 2013 convention in Orlando, Fla., the ferrous scrap sector still faces a number of questions, even if events of the past five years have at least pushed some factors of the market--especially pricing--onto firmer ground than in spring 2008.

The results have been mixed so far this year. January was essentially flat, as was the previous month, February lost some value and then March ticked up about 10 percent. But March was only the second month of the past seven to see prices rise across the board. The March increases brought prices back to the highest levels seen since May 2012--but industrial grades were still down an average of about $45 per ton, or 10 percent, from last May. Obsolete grades were down slightly less than that--about $20 to $25 per ton for heavy melting and shredded scrap--in the same comparison.

“There is no doubt that we’re grateful for the way prices have bounced back from late 2008 and 2009,” a Pittsburgh scrap dealer said. “We’ve had some good months and even a solid year or two since then. But there are still too many unanswered questions creating a lot of challenges for us right now, and I don’t know anyone who can honestly answer which trends are going to dominate the rest of the year.”

The official, by-the-textbook recession actually began in December 2007 and ended in June 2009, according to the National Bureau of Economic Research, although the effects of it were not fully felt in the scrap market until fall 2008. Many scrap players said that until the bottom fell out it wasn’t possible to detect that a downturn was coming. Harder yet was knowing when things would turn around again.

But some key trends have emerged during the past five years.

Automobile sector: Many sources have remarked over recent years that without the resurgence of the domestic auto market, ferrous scrap would have suffered even more deeply during the economic crisis. After reaching sales of 16.1 million passenger vehicles in 2007, sales slumped to 13.2 million vehicles in 2008 and 10.4 million in 2009, according to National Automobile Dealers Association (NADA) figures. After the “Cash for Clunkers” program and the government bailout of General Motors, sales rebounded to 11.6 million vehicles in 2010, 12.7 million in 2011 and 14.4 million last year. So far, 2013 is on pace for 15.3 million vehicle sales, according to NADA estimates. The manufacture of these vehicles demanded a lot more steel, which in turn demanded more ferrous scrap.

Construction sector: The flip side of the coin from auto demand has been the consistent lack of consistency in the construction market, which has yet to move toward a sustained recovery. Nonresidential construction is “facing a very slow recovery from the bottom, (but) we’ve clearly hit the bottom on this,” Guilherme Gerdau Johannpeter, president of Tampa, Fla.-based Gerdau Long Steel North America, said at a steel conference in March. As for residential construction, January statistics from the U.S. Census Bureau support the argument that the domestic construction recovery might have legs. Building permits for private homes increased 1.8 percent to 925,000 in January from 909,000 the previous month, and while housing starts dropped 8.5 percent to 890,000 from 973,000 in December, January’s housing starts were still 23.6 percent higher than 720,000 starts in January 2012. “The bad news is that the industry is probably still in one of the worst depressions in decades,” one steel manufacturer told AMM. “The good news, however, is it started about six or seven years ago, so we’ve got (those) years behind us.”

The rise of frag: One major change in the domestic scrap market during the past five years has been the ascendancy of shredded scrap. There were about 230 shredders operating in the United States in 2006; today, there are more than 300. About 11.3 million tons of frag were sold in 2008. That level fell to 8.5 million tons in the downturn of 2009, but rebounded steadily to an all-time high of 15.4 million tons last year. Frag now accounts for 30 percent of all scrap sold to mills and foundries, up from 24 percent in 2008. The price spread between shredded scrap and the prime grades has narrowed to an all-time low during the past year.

Export demand: Global demand for scrap tripled between 2000 and 2008. Along with that boom in demand came higher prices. U.S. ferrous scrap exports totaled nearly 21.5 million tonnes in 2008, hit 22.4 million tonnes in 2009, 20.5 million tonnes in 2010 and an all-time record of 24.3 million tonnes in 2011 before easing to 21.4 million tonnes last year, according to U.S. Commerce Department figures. As international demand rises, domestic scrap consumers scramble for material in each monthly market. Global demand for scrap tripled between 2000 and 2008. Along with that boom in demand came higher prices. U.S. ferrous scrap exports totaled nearly 21.5 million tonnes in 2008, hit 22.4 million tonnes in 2009, 20.5 million tonnes in 2010 and an all-time record of 24.3 million tonnes in 2011 before easing to 21.4 million tonnes last year, according to U.S. Commerce Department figures. As international demand rises, domestic scrap consumers scramble for material in each monthly market.

Mill raw materials control: In response to the competitive international landscape, domestic mills have sought ways to have better control over their access to scrap. Nucor Corp., Charlotte, N.C., and Steel Dynamics Inc., Fort Wayne, Ind., have purchased large scrap companies, and they and other steelmakers are attempting to exert more control over direct-reduced iron, pig iron, hot-briquetted iron and other alternatives to ferrous scrap. In turn, this has allowed some mills to stay out of the “open” monthly market for scrap.

Mill scrap purchases: In 2008, mills--operating at capacity utilization rates close to 90 percent for most of the year--purchased 47 million tonnes of ferrous scrap from the market. That number fell dramatically to 38.6 million tonnes in 2009 before steadily climbing back to 51.9 million tonnes in 2012. Despite the increase in mill demand for scrap, however, prices actually fell last year from 2011 levels, partially because export demand declined and partially because scrap supplies were adequate for mill needs.

Mill capacity/output: U.S. steel mills’ capacity utilization rates averaged about 83 percent in 2008, but it was much higher than that for the first three quarters of the year, when it averaged close to 90 percent. It fell to an all-time low in 2009, averaging around 51 percent, before climbing back to about 70 percent in 2010. In the three years since then, the average annual rate has been stuck at around 75 percent (it was running at 75.7 percent this year through mid-March), according to data from the American Iron and Steel Institute, Washington.U.S. steel mills’ capacity utilization rates averaged about 83 percent in 2008, but it was much higher than that for the first three quarters of the year, when it averaged close to 90 percent. It fell to an all-time low in 2009, averaging around 51 percent, before climbing back to about 70 percent in 2010. In the three years since then, the average annual rate has been stuck at around 75 percent (it was running at 75.7 percent this year through mid-March), according to data from the American Iron and Steel Institute, Washington.

The key question is how these and other trends will perform during 2013 and where that will take scrap availability and pricing. Not all first-quarter data are available yet, but what has been reported so far is suggestive.

“Market factors generally are in a bit of a holding pattern right now, as neither demand nor scrap generation appear to be heading in a determinate direction,” one buyer for a Chicago-area mill said. “We don’t know yet what the market will bear as far as steel prices are concerned, and we don’t know yet how our order books are going to look in six months. All of that and more will have a serious bearing on where scrap prices move in the rest of 2013.”

Profit-and-loss data aren’t available for privately held companies, but there are recent signs coming from publicly traded companies that might offer clues to financial difficulties still facing the scrap sector.

Sims Metal Management Ltd. said in February it was working on cost-cutting and business-building strategies in the wake of another major loss. The world’s largest metals recycler posted a net loss for its fiscal first half ended Dec. 31, driven largely by its North American segment, which saw a reduction in intake to its yards and shipments to customers.

Portland, Ore.-based Schnitzer Steel Industries Inc.’s operating earnings fell 91.9 percent in its fiscal first quarter to $1.2 million, the company said in January, citing lower scrap prices and compressed margins, among other factors. Declining sales prices, constrained supply and unfavorable timing of shipments lowered selling volumes and compressed margins in Schnitzer’s ferrous scrap business during the three months ended Nov. 30. “As anticipated, during the first quarter of fiscal 2013 we continued to face difficult market conditions for recycled metals, including a sharp drop in both ferrous sales prices and volumes, due to soft demand resulting from slowing global growth and the weak domestic economic environment, which continues to impact scrap generation,” president and chief executive officer Tamara Lundgren said in an earnings report.

OmniSource Southeast, a division of scrap major OmniSource Corp., Fort Wayne, Ind., has undergone an organizational restructuring that resulted in between 40 and 50 layoffs--an estimated 10 percent of the division’s work force--in November, sources familiar with the situation told AMM. A weak business environment and related margin compression was the primary driver behind the “right-sizing,” according to sources.

“The organizational changes are just an outcome of business conditions. Omni(Source) is trying to get its business right-sized to meet the current market environment and demand,” a well-placed source said.

U.S. scrap prices are expected to gain some strength despite what was a sluggish start to the market in 2013, according to Commercial Metals Co. chairman, president and chief executive officer Joseph Alvarado. The optimism stems from historical trends. Lower demand, weaker selling prices and fewer ferrous and nonferrous scrap shipments hurt the Irving, Texas-based company’s scrap division during its fiscal first quarter. The Americas Recycling segment posted adjusted operating earnings of slightly less than $4.5 million for the three months ended Nov. 30, down 78.4 percent from $20.8 million in the same period a year earlier, on sales that declined 15.2 percent to almost $352 million from $414.8 million.


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