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Volatile times for US non-ferrous scrap

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The US non-ferrous scrap marketplace appears to be somewhat baffling to some market participants at present. While underlying demand for both copper and aluminium, as well as other non-ferrous metals, has been quite strong and is expected to remain so this year, plentiful scrap supply has not been allowing scrap processors and traders to take advantage of what has been generally a rising commodity pricing environment. 

From an international perspective, Chinese National Sword Initiative import restrictions officially took effect on March 1, reducing that nation’s purchases of lower purity metallic scrap. At the same time, logistics issues in the US, including rising freight costs and problems with truck availability, are becoming increasingly challenging. It also still remains unknown what impact international trade issues – including the recent aluminium Section 232 tariffs – will have upon scrap as well as primary product.

Non-ferrous scrap demand has changed dramatically in recent months, Stephen Moss, vice-president of Bryn Mawr, Pennsylvania-based, Stanton A. Moss, observes, noting that about a year ago most consumers were looking to buy scrap for either the current month or the next month. But recently they are not looking for several mill scrap grades to be delivered for as long as three months.

There is no question that last year was a much better year for the non-ferrous scrap market than 2016 had been, Joseph Pickard, chief economist and director of commodities for the Institute of Scrap Recycling Industries (ISRI) points out. He says it is generally expected that demand will be similar – not necessarily a whole lot better, but certainly not worse – this year, especially given that certain US governmental policies, including corporate tax rate cuts and the recent easing of the regulatory environment, has resulted in improved business sentiment.

“This is even though some of the numbers on the ground have not been as earthshattering as one would hope,” he admits. Recently there has been a slight weakening of light vehicle sales from the all-time record set in 2016, he points out, noting that the automotive sector is a huge consumer and generator of non-ferrous scrap. But at the same time the housing market, which has already come a long way, continues to post positive numbers for new housing starts and the manufacturing purchasing managers index of the Institute for Supply Management continues to indicate growth in the manufacturing sector.

Pickard says that this, and expectations that the US economy is going to grow faster this year than it did last year, are not just good for manufacturing, but for domestic scrap demand as well. “However, certain other factors, including uncertainties of what is going to happen with China and when domestic transportation bottlenecks will get solved are causing major headaches for US metals recyclers," he says, observing that companies are still trying to develop strategies to deal with these issues.

“It is so hard to figure this market out. It just doesn’t make sense,” one East Coast scrap processor declares. “With all of the recent volatility, there is no way to plan. We are just hoping for the best more than ever.” This, according to Michael Diehl, director of copper for Los Angeles, California-based Alpert & Alpert Iron & Metal Inc, comes as – even though demand is “deceivingly robust” – non-ferrous scrap prices are still cheap and have been getting cheaper.
This is somewhat unusual as John Mothersole, director of research for the pricing and purchasing service of IHS Markit, notes: “Scrap prices are usually the tail that gets wagged by the dog,” with the dog being primary commodity prices. But even though they came down slightly from their January peaks, this, Mothersole says, came as the market got to grips with the fact that Chinese economic growth is slowing. He expects that primary non-ferrous prices should stabilize at, or close to, current levels.

Particularly for copper, but also for aluminium and other grades of non-ferrous scrap, Diehl says it is still very much a growth story for scrap demand. “With the tightening of copper concentrate supply and with few, if any, new mines coming online, smelters are looking to increase their copper cathode production,” he points out. “But that hasn’t spilled into scrap prices. Right now, you can buy all the copper scrap that you want at whatever price that you want.” It is, however, possible that is starting to change, Diehl says. “Demand has begun to pick up, at least slightly, and sooner or later – most likely sooner – possibly by the fourth quarter of this year.”

Pickard, however, points out that primary exchange prices could rise and fall in response to several different factors, including concerns about a trade war or that financial investors have decided to get in or out of the market for a number of reasons.

“By comparison, looking at the scrap spread tends to provide a more accurate picture of the balance of non-ferrous scrap supply and demand,” he says, noting that spreads have been wide and appear to be staying wide, which is typically an indication that the market is well supplied.

However, there seem to be different market dynamics at play for different types of scrap, including variation been domestic and international demand. Given strength in US secondary capacity, Matt Heitmeier, vice-president metals for Padnos Co, Holland, Michigan, says there is strong domestic demand for such secondary non-ferrous scrap as copper radiators, red brass, hard brass and cast aluminium, albeit at lower selling prices than processors desire. Meanwhile, he says that when it comes to high-quality copper and aluminium scrap, domestic mills seem to have plenty on hand, at least for the time being.

That comes despite concerns that with China’s National Sword Initiative now fully in effect, and China importing less low-quality scrap and more high-quality material, that it could potentially affect how much high-quality material will be available domestically. “But so far that hasn’t been the case,” Pickard says.

It is specifically related to one portion of the National Sword Initiative – the metallics maximum allowable carried waste rule that was implemented on March 1 – that is impacting non-ferrous scrap. It requires the scrap that China imports to have no more than a 1% impurity level – a threshold that Pickard says is very hard for US processors to achieve.

The impact of this rule might be less extreme than initially expected, Mothersole says, given that Chinese buyers actually started to change their buying behavior in late-July or early-August of last year – shortly after the regulation was announced.

Pickard says January trade data – the latest data currently available – does not provide a complete picture of the Chinese response given the timing of the Chinese lunar holiday, but it does indicate that although overall US copper scrap exports to China declined by 31.7% year-on-year, US shipments of bare bright copper jumped by 523.4% year-on-year in January. Similarly, US aluminium scrap exports to China fell by 13.5% year-on-year in January.

Export market changes 
With China, which traditionally accounts for about 50% of US non-ferrous scrap exports, not taking lower quality material, the big question is what domestic processors are doing with that material. In some cases, companies are just letting it sit around in their yards while they find another home that is willing to accept this lower quality material, while others are willing to process it further into a product customers find more desirable.

Pickard says that for copper scrap, there has been increased interest from Malaysia, where US copper scrap exports increased dramatically (see table), as well by South Korea (up by 69.5%), Japan (up by 120.6%) and Germany (up by 52.1%). He says that US aluminium scrap has seen increased interest from South Korea (up by 12.6% year-on-year), Mexico (up by 12.9%), India (up by 168.9%), Malaysia (up by 364.3%) and Indonesia (up by 98.3%). “These are all economies where the manufacturing base has been growing and that are seeing faster economic growth,” he explains.

Padnos’ Heitmeier also points out that several US processors are also now beginning to invest in certain downstream technologies to take lower quality scrap, such as zorba, and convert it into a higher quality product. This, he says, includes investing in new X-ray sorting equipment or adding new wire-chopping capabilities, enabling them to make a cleaner, more desirable product, not just for Chinese consumers, but their domestic customers as well.

Logistics issues

Logistics issues, particularly trucking, have also been a huge challenge for non-ferrous scrap processors, Moss says, and they have clearly been exacerbated by the new electronic logging device (ELD) mandate that went into effect in December 2017. He observes that over that timeframe, not only has the availability of trucks diminished by an average of 5-10% – although that number varies lane by lane – but freight rates have moved up about 20-50%.

Just how much the ELD regulation contributed to this is, however, disputable according to Mothersole, given that the large trucking firms that represent the bulk of the capacity in the industry had already complied with the mandate prior to December. Also, other factors, including the back-to-back hurricanes in the third quarter of last year, severe weather conditions this winter and the perennial truck driver shortage in the industry, which is apparently getting worse given the tight labor market and the low unemployment rate, have also been contributors. 

Heitmeier says it has not helped that the new ELD rule limits on truck drivers’ hours not only include the hours they are on the road but the time it takes to load and unload trucks.

Further compounding the issue, Moss points out, is that with it taking an extended amount of time to get trucks, that means that mills are being required to buy their scrap even further out to ensure they can receive it on time.

“And what makes it worse is that we can’t necessarily trust the rates that trucking companies are quoting,” Moss says, explaining that at times on the day that processors need to ship product to customers trucking companies have sometimes said that they do not have any trucks available at the price they had previously quoted, adding that they also said they would be able to provide a truck if processors were willing to pay 10% extra.

Pickard says it is because of such situations that you hear about scrapyards who need to ship six different loads contracting transportation for eight or nine loads, assuming that a few of those trucks will not show up. He says this is especially the case in certain extremely tight transportation lanes, including the West Coast and Chicago.

It is also somewhat uncertain what impact the newly imposed 10% aluminium Section 232 tariff will have upon aluminium scrap providers in the short-, medium- and long-term. Even though scrap is excluded from the tariffs, Pickard points out that should it bolster domestic aluminium production the tariffs should increase demand for aluminium scrap to produce the primary product – at least over the short-term.

That is assuming that there are not any unintended consequences from those tariffs, including the potential for a trade war or for increased imports of aluminium-containing finished goods. “Also, it is possible that we could see a slowing of US economic growth should prices on US-produced finished goods go up to the point that it affects consumer purchases,” Pickard says. “It is possible that these long-term risks could outweigh the short-term benefits.”

Overall business sentiment in the non-ferrous scrap market continues to be high with recyclers continuing to see conditions that are much better than they had been just a few years ago. “But while the overarching picture is good, it isn’t quite as positive as expectations had been about three to four months ago,” Mothersole says. “There is a little more uncertainty than there had been, including about the impact from China and from transportation and trade issues. All of that has resulted in more volatility,” he explains.

By: Myra Pinkham

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