Veteran scrap recyclers have seen a wide range of metals pricing over the course of two or more decades, but many look at overall pricing trends as having experienced a potentially irreversible shift when the industrialization and urbanization of China began reaching full speed in the late 1990s.
Commodity analysts who watched mineral and metal prices soar from the late 1990s to 2008 created the term “super cycle” for the effect on markets caused by this influx of tens of millions of people to urban centers annually and their growing disposable incomes.
In late 2008 and into 2009, the super cycle took a serious turn downward with the financial crisis that severely bruised the economies of the United States and most Western European nations. Slowly and steadily these Western economies have improved.When metals pricing analysts and recy
clers consider the long-term staying power of the super cycle, they now often turn to China. After years of sustained economic growth, history indicates that at some point China will hit the downside of the business cycle. When it does, how much of an effect might this have on the value of nonferrous or ferrous scrap?
Finding new footing
China’s growth has been far from the only factor that has brought the value of copper from 80 cents per pound in 1998 to more than $2 per pound in 2017. Urbanization and the widespread use of personal and office electronics also have soared in other parts of the world, and inflation, while not at a fever pitch in the 21st century, plays a role in higher prices as well.
Recyclers contacted for this story say they largely see it as unlikely that copper will again fall below $1 per pound or that ferrous scrap could again fall below $100 per ton, in part because inflated operating costs essentially would create a negative va
lue for those metals at those price levels. “Today, if scrap goes below $100 per ton at the scale, the flow dries up,” says Albert Cozzi, a director with Bellwood, Illinois-based Cozzi Recycling. “Additionally, even though we have not had much inflation for the last couple of decades, we have still averaged 2 to 2.5 percent per year. Consequently, the $100 per ton scrap of 1998 converts into $160 to $175 per ton in today’s dollars,” he adds.
Jerry Miller, chairman of Winona, Minnesota-based Wm. Miller Scrap Iron & Metal Co., does not rule out the possibility of a long-term floor for No. 1 heavy melting steel (HMS) scrap at $100 per ton. He does not see any conditions in the near term, however, that would drop No. 1 HMS below $150 per ton.
Regarding copper pricing, Miller sets a long-term floor at $1.25 per pound, though he says he does not envision it falling below $2 per pound any time soon.
“China does influence demand, but others may pick up some [of that during] a downturn,” he says. “Also, the cost of mining and producing steel and nonferrous metal affects where a price floor is, as do rising production costs.”
“I do not think copper will ever go below the $1.50 per pound level,” says Michael Eisner, owner of Chagrin Falls, Ohio-based Premier Metal Services LLC. “It appears the floor has been in the $1.80-to-$2 level, and, as these levels were tested over the last couple of years, there was resistance to go lower. I think this is due to the mining costs of copper ore.”
Lane Gaddy, CEO of El Paso, Texas-based W. Silver Recycling, points to a similar floor for copper, saying, “In the last few years, we have tested lows around $1.90 [per pound], and I think that is a fair floor moving forward.”
“The cost of mining and producing steel and nonferrous metal affects where a price floor is, as do rising production costs.” – Jerry Miller, Wm. Miller Scrap Iron & Metal Co., Winona, Minnesota
He adds, “I think we saw the bottom of copper pricing in 2009 that we will see in our lifetimes. We saw the credit crunch was the overall catalyst for seizing commodities lower than basic market forces would allow. Barring any similar overall mass credit catastrophe, we will not approach those levels again.”
Brian Shine, president of Lancaster, New York-based Manitoba Corp. and current vice chair of the Institute of Scrap Recycling Industries (ISRI), also is open to a greater level of global unpredictability when saying, “There is nothing to say that copper and steel [pricing] could not return to much lower levels not seen since the late 1990s. Having said that, it does not appear we will return to those levels, as [primary metals] producers appear to have much more market discipline and will reduce production levels if and when market conditions deteriorate.”
Here, there and everywhere
If super cycle pricing is indeed dissipating, that will not necessarily cause the global scrap industry to retreat into separate, regional corners, recyclers say.
For that to happen, they add, the global political climate likely would have to be severely disrupted. Otherwise, global commodity pricing that has become more connected (if not always more transparent) dictates that metal buyers anywhere will seek out supply from wherever it can be obtained.
“It appears the market dynamics are pretty consistent throughout the world,” Shine says of the current state of primary and scrap metal pricing. “There can be pockets of increased or decreased pricing, but these are usually short term in nature and then relatively quickly return to equilibrium,” he adds.
“Scrap metal is a very efficient commodity,” Cozzi says. “The price for scrap metal anywhere in the world is the same at any given time other than the differences in freight rates, plus or minus. If that weren’t the case, arbitrage [opportunists] would come in and compete away any price difference.”
One factor that can cause inefficiencies, Cozzi says, involves policymakers. “That is not to say there are not times when the price of commodity may be distorted by government policy. For example, if the government puts on export restrictions, prices will be artificially low.”
Most recyclers contacted for this story say they want to see trade channels remain navigable. (See the sidebar, “Mixed Reviews on Isolationism,” on page 55.) They say that even as China’s demand recedes, other global opportunities likely will emerge.
“I certainly hope and expect there to always be export options for recyclers to sell materials to overseas consumers,” says Shine, adding “This keeps the consumers here in North America hungry for units.”
Gaddy says, “There is no question developing markets—China or otherwise—will always be important for scrap. Economies that are transitioning from undeveloped to developed will always have needs for raw materials to improve the quality of life for their citizens.”
Cozzi points to the supply side in the United States as the reason why “the U.S. will continue to be a net exporter of scrap for the foreseeable future. We produce more scrap here then there is the demand for. Consequently, we will need to export that material somewhere.”
He continues, “Because very few countries are scrap positive, excess scrap will continue to be shipped overseas.”
Gaddy and Eisner say a retreat by China’s scrap importers means nonferrous recyclers have had to reconsider how to handle some lower-grade materials.
“I do think what the industry has learned is that we cannot depend on any one economy, developed or developing, as the full source of support for pricing and that companies have had to learn to assume there will be inconsistent homes,” Gaddy says. “This is done through flexibility of making different packages for different consumers—not always taking low-grade items that may not have resale value—and operating efficiently enough so, if there are times that are adverse to selling, cash flow is not affected.”
Eisner says, “The unfortunate thing is, no one in the United States cares about the environmental destruction that China and other nations are committing while recycling our low-grade materials. Workers in these countries suffer from air pollution, water contamination, slave wages and other circumstances that we would not stand for. Our higher paying jobs have been sent offshore, and no one ever asks why labor is so cheap in other countries.
“Again, globalization is great, if done by our standards,” he continues. “Unfortunately, people want cheap products, as long as they don’t have to see how they are produced.”
As the super cycle winds down, and as “demand from China decreases, combined with lower EPA (Environmental Protection Agency) regulations, we may see a copper refinery built in the U.S.,” Eisner says.
The highs and the lows
Through prices that rise or fall, recyclers and traders can be quick to point out that maintaining a margin creates the difference between a profitable transaction and a balance sheet with black ink.
That’s not to say pricing makes no difference, however, as these same recyclers find many positive attributes connected to a bullish pricing environment—and only a couple of positives tied to lower pricing.
In a low-pricing environment, “The only advantage is that a lower copper price brings cash requirements lower,” Eisner says.
Shine also cites “reduced cash tied up in inventory” as an advantage.
On the ferrous side, Cozzi says, “When market prices are low, there is less volatility and market swings are not as severe. Also, when market prices are stable and lower, grading by the consumers tends to be more consistent.”
“Scrap metal is a very efficient commodity. The price for scrap metal anywhere in the world is the same at any given time other than the differences in freight rates, plus or minus.” – Albert Cozzi, Cozzi Recycling, Bellwood, Illinois
Miller remarks that low prices “certainly can weed out the competition, reduce instances of theft and slow down the growth of substitute materials [used by manufacturers].”
But the same recyclers craft a longer list of the advantages of a bull market. “The benefits of low-cost metal are outweighed by the benefits of higher-priced metal,” Cozzi says. “Higher prices mean dealers are able to work on higher margins, and the reason prices are higher is because there is demand for the material, which points to good times and operating rates for consumers.”
Eisner says, “As markets go lower, it generally indicates that the economy is declining or stagnant. This, in itself, is a cause for concern because lower markets lead to layoffs, bankruptcies and general bad economic conditions.”
In processing yards, the margins are generally harder to come by when prices (and volumes) are lower, the recyclers say. “At a certain [price] level, flow decreases,” Miller says. “Margins can only go so high, and operating costs stay within a narrow range. All of these factors lead to less profit, which leads to less investment.”
“The key factor in determining capital investments is volume to feed the equipment and markets to consume the finished scrap material,” Shine says. “Investments are being made in all market conditions, though certainly more cautiously in difficult times.”
Efficiency will win out, recyclers say, and investments in equipment and skilled people will continue for that reason. “The key driver in any capital equipment acquisition decision is always going to be the margin,” Cozzi says. “If an investor thinks acquiring a piece of equipment will make his operation more efficient or give him a leg up on the competition, he will attempt to make that acquisition.”
Gaddy concludes, “Lean companies understand that being lean means understanding where your margins are and to only handle business that makes sense for the company. In our opinion this means if you need new equipment, you go ahead and invest regardless of pricing, because it is very easy to get stuck in a negative spiral of not keeping up with cap ex and then finding operating costs are quickly rising. The keys are not handling business that does not provide gross margin to the organization while continuing to invest and keep up with PP&E (property, plant and equipment) investments, so when times improve you are ready and able to succeed as an organization.”