Dollar days: metals market watchers believe high pricing for scrap metals is likely to continue in 2006

The Commodity Roundtable Forum, hosted by the Institute of Scrap Recycling Industries Inc. (ISRI) in Chicago in late September, provided a central point for a series of presentations and accompanying speculation about how markets for scrap metal will fare in 2006.

In sessions designed to address three of the most commonly traded scrap metals--steel, aluminum and copper--industry analysts and executives offered their thoughts on the challenges and opportunities in the scrap market.

For demolition contractors and C&D recyclers, the message would seem to be to keep paying attention to the scrap metals they handle in 2006, because mills, smelters, foundries and export brokers will be willing to pay for material to feed a healthy metals industry.

IRON-RICH DIET

The world's steelmakers now produce 1 billion tons of steel annually, and it does not look like that number is likely to shrink back under 1 billion any time soon.

Presenters at the Ferrous Roundtable at the ISRI Commodities Forum were predominantly bullish toward the future of steel demand and pricing, as well as demand and pricing for the ferrous scrap used to make steel.

Steel industry analyst Michelle Applebaum of Highland Park, III., predicts that domestic steelmakers this summer "have seen a low ... both in production and prices" that will not be typical for the next two years.

She predicts an average price of $569 per ton for hot-rolled steel coil in 2006 and an increase to $650 average pricing in 2007.

Additionally, she believes steelmakers in the United States will boost production of steel from an estimated 101 million tons in 2005 to 109 million tons next year and nearly 111 million tons in 2007.

As for scrap, Applebaum says her research firm sees "a continued metallics price push" as new steel production already in place in China and being added in India will strain supplies of iron ore, coke and ferrous scrap.

More consolidation within the steel industry is also likely, according to John Harris of Mittal Steel NA, Chicago.

Mittal makes 65 million tons of steel annually at mills located around the world, but even this represents less than 7 percent of global production. "There is still more to happen," Harris said of steel industry consolidation, noting that by comparison three iron ore companies comprise 70 to 80 percent of that market.

Harris also commented that further consolidation is warranted in the scrap market, and called the recent Simsmetal-Hugo Neu merger very impressive.

Ferrous scrap dealers have been among those amazed at the booming Chinese steel industry, and they have helped adjust scrap flows to supply what is now the world's largest steel producing nation (by far).

But as amazing as the surging Chinese economy may be, Harris of Mittal Steel says there have been prior economic booms that the scrap and steel industries have weathered.

Harris outlined current global ferrous scrap flows and remarked on future projections. "The main focus the last few years has been scrap going to China," said Harris, "but it's always been going to the Far East."

Demand for imported ferrous scrap in China "has leveled off, and it may well recede," said Harris. This is in part to slower steel industry growth as well as the decision to install primarily basic oxygen furnaces rather than scrap-dependent electric arc furnaces.

Historically, Harris noted that Japan was a long-time "net importer of scrap, but now it is an exporter. For Japan, that process from a growing post-war steelmaker with a hunger for scrap to a developed economy that could export took about 40 years, he added.

It is not certain how long it will take for China to be self-sufficient in scrap, but Harris said the prediction that it will be at some point is a safe one. "This is a phenomenon that has been repeated," he stated.

In the near-term, though, Harris observed that the scrap iron and steel market remains a volatile one where $20 and $30 per month price movements are considered "sideways" compared to the $60 swings experienced in other months.

RED HOT RED METALS

For the past few years, the world's scrap dealers have benefited from newfound demand for their materials--especially copper bearing-scrap--from the booming Chinese economy.

The production of red metals in China is likely to remain at its new lofty level, which should keep copper trading at the top end of its range for the foreseeable future, according to presenters at the Copper/Brass Roundtable.

"I think you'll see continued high prices," said Megan Hovey of Refco LLC, Hudson, Ohio. She predicted that copper would trade on the Comex market at an average of from $1.45 to $1.55 per pound in 2006. "China is going to remain the biggest consumer of finished copper," she added, remarking that the nation now consumes about 20 percent of the world's copper.

On the supply side, some new mining capacity is coming online, LME inventories are starting to build back up and some time next year, projected supply should exceed demand.

But thus far, the market is not reflecting these renewed supply factors. Hovey said copper trading at $1.70 is higher than she thought it would reach, so she will not be surprised if her $1.50 forecast for 2006 is low. "Prices may not necessarily move to $2.00 per pound, but then again I didn't envision $1.70," she remarked.

Other panelists backed the notion that market fundamentals are sound. David Lane of heating and air conditioning manufacturer Lennox International, Richardson, Texas, said domestic demand for copper tubing remains strong. "Our industry is expecting to use some 30 to 70 million pounds of additional copper" in 2006, he remarked.

A development that could reverse that trend in the future, though, is the introduction of an aluminum coil by a competing manufacturer. Should this prove workable and economically sound, others could follow. "At $1.70 per pound for copper, you're going to see manufacturers find ways to build units without copper," said Lane.

Rick Rifkin of scrap firm OmniSource Corp., Fort Wayne, Ind., says the copper market's pricing and backwardation shows "the market is screaming for that material to come to the market today."

He says OmniSource is using more efficient processing methods to keep inventory low and also does some hedging to minimize risk. "We try to maximize our throughput and minimize our inventory," said Rifkin.

Rifkin said processing improvements have enabled OmniSource to turn around its streams of industrial scrap at a 15-day average while obsolete scarp inventory turns over in 30 days on average.

Ingot manufacturer Allan Sabol of Colonial Metals Co., Columbia, Pa., says his segment of the market still has excess capacity, particularly because there are fewer U.S. ingot-melting facilities.

"Our concern is that the manufacturing industry is dying [in the United States] and there doesn't seem to be any groundswell of support [to save it]," Sabol remarked.

Rifkin and Lane also expressed concern as to the state of domestic manufacturing, with Rifkin pointing to the cost of insurance and regulatory compliance as concerns, and Lane noting that manufacturers in Asia can produce window air conditioner units "for less than what it costs us to build a coil."

The ISRI 2005 Commodities Roundtable Forum was held in suburban Chicago from Sept. 20 to Sept. 22. Some 600 brokers, traders, processors and suppliers gathered for the educational and networking event.

The author is editor of Construction & Demolition Recycling and can be reached at btaylor@gie.net.

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