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Ferrous scrap recyclers would like to see larger volumes, but forecasts call for a more stable outlook.

Brian Taylor February 26, 2013

Scrap recyclers often like to describe their industry as one where each day is different from the rest and each week or month can hold a new surprise.

At scrap yards and in brokerage offices around the world, ideally that sense of adventure still exists. But when looking at general business conditions from about 2010 to early 2013, the causes of excitement are not readily apparent.

In Europe and North America, scrap supplies have been tight and hoped-for economic rebounds have most often been snuffed out before they could really get started.

On the demand side, meanwhile, steel mills in the developed world have chipped in with steady but not spectacular demand, while export markets in the developing world provide perhaps the biggest variable business condition.


Smaller Numbers

Scrap recyclers contacted by Recycling Today Global Edition for its regular market reports and for this article are not anticipating that 2013 will be a year of tremendous change in the ferrous scrap market.

The supply situation of the past several years—the same number of processors and brokers pursuing less tonnage than existed before the financial crisis—remains the most common prediction.

The results of abundant processing capacity in a slack market can be glimpsed by looking at recent statements of publicly-traded companies.

In mid-November 2012, Sims Metal Management advised investors to expect a slow start to the company’s fiscal year 2013 first half. “Due to continued challenging market conditions,” the company stated in a news release, “Sims Metal Management now expects first half Fiscal 2013 underlying EBITDA (earnings before income tax, depreciation and amortization) to be approximately 20% lower than the previous guidance range.”

Soft on Steel

A December 2012 report by Moody’s Investors Service, Boston, portrayed two different outlooks for the steel industry in two different parts of the world—Asia and Europe.

According to a summary of the report on the AgMetalMiner.com website, Moody’s labeled the outlook for Asia as stable. European steel companies, on the other hand, are likely to see their “profitability deteriorate in 2013, much of it due to continuing weakening of demand and prices.”

One of the most storied names in European steelmaking, ThyssenKrupp AG, Germany’s largest steelmaker, has gone through financial difficulties and expects the same for 2013. In late January, the company pointed to weak steel and automotive markets as likely to continue, and advised investors it may not be profitable throughout 2013.

“Against the background of the weak global economic recovery, the prospects for the steel market remain subdued,” Reuters reported ThyssenKrupp as saying in mid-February after reporting a 38% drop in first quarter 2013 profits.

Two major contributors to the company’s weak financial position were major investments in mill capacity in Brazil and the United States as the financial crisis was beginning.

Another large Europe-based steelmaker, Luxembourg’s ArcelorMittal SA, also has reported a significant loss ($3.7 billion) for 2012. According to Reuters, ArcelorMittal also took the step of “writing down the value of its European steel business by several billion dollars.”

As 2013 gets underway, ThyssenKrupp in its February news releases says the steelmaking sector of its business is characterized by “low shipments and declining prices” that “continued to weigh on business” in its Steel Europe division.

Sales in the first three months of its fiscal year “came to €2.3 billion,” notes the company. “Adjusted EBIT (earnings before income tax) fell to €30 million (prior year: €102 million) as a result of the persistent weakness of the European market.”

The announcement was made before the company discovered or disclosed inventory irregularities in its United Kingdom operations, and well before it would publicly announce first-half fiscal year 2013 results on Feb. 22, 2013.

“This updated earnings guidance relates primarily to Sims’ assessment of recent intake volumes and its anticipated shipping program, particularly for deep sea ferrous products, forecasted for December 2012,” the news release continued. “As indicated at the Annual General Meeting, Sims anticipated relatively weak intake volumes across all regions coupled with, until recently, tepid demand by deep sea ferrous buyers.”

The company went on to note that while some economic indicators were pointing to a rebound, any positive ripple effects had not reached across the scales of its scrap yards.

“Whilst recent positive economic signals in the U.S., including declining unemployment, positive consumer confidence data and increasing industrial production, is encouraging, the direct benefit to intake volumes and metal recycling margins typically follows at a lag which will not benefit Sims Metal Management through the 31 December 2012 period. “

As 2012 turned into 2013, some of those economic indicators were continuing to point to better scrap generation, but not all of them.

In Europe, the sale of automobiles (and thus the likely near-term future production) was hitting a new low as of January 2013. According to the ACEA (European Automobile Manufacturers Association, Brussels), “In January, demand for new cars declined by 8.7% in the European Union. New registrations amounted to 885,159 units, reaching a historic low recorded for a month of January, since the start of [data collection] in 1990.”

In the United States, meanwhile, construction has been the biggest source of disappointment for ferrous scrap generation in the past five years. Tentative signs of a construction rebound in the U.S. are beginning to be recorded, although how quickly this will be noticeable at scrap yard scale houses remains to be seen.


Low Heat
Scrap prices in both Europe and North America have, to a great extent, remained balanced in the $350 to $400 per ton range perhaps in large part to demand that is as equally restrained as supply.

Statistics accumulated and reported by the WorldSteel Association, Brussels, point to relatively flat steel output in most parts of Europe and North America while the growth takes place largely in Asia.

During the same five-year stretch that recyclers in Europe and North America have been coping with disappointing scrap generation and flat nearby mill demand, China has continued to increase its output of raw steel.

“China’s crude steel production in 2012 reached 716.5 million tonnes, an increase of 3.1% [compared to 2011,” notes WorldSteel. “China’s share of world crude steel production increased from 45.4% in 2011 to 46.3% in 2012.”

Unfortunately for recyclers who would like higher per-ton prices caused by greater demand, basic oxygen furnaces continue to produce most of China’s steel, putting greater pressure on iron ore pricing and demand instead of scrap.

However, adhering to an environmental agenda spelled out in China’s 12th Five-Year Plan could result in the use of more ferrous scrap by the nation’s steelmakers.

Speaking to an audience of recyclers in November 2012 at the Electronics Recycling Asia event in Guangzhou, China, Professor Wang Yangzu of the nation’s Ministry of Environmental Protection remarked that one of the ways China can increase its recycling activity is in the steel sector.

He remarked that Chinese leaders are concerned that China’s steelmakers use scrap as only 14% of their steelmaking feedstock, while steelmakers in European and North American nations use scrap percentages as high as 58% or even 83%. China’s 14% rate amounted to less than 80 million tonnes of ferrous scrap melted in 2011, according to Wang, who added that China “plans to reach 200 million tonnes [melted] in the future.”


Crystal Ball

Ferrous scrap recyclers in Europe and North America could face two different sets of circumstances in 2013. While the export market in both countries may remain stable to strong—based on economic forecasts for China, Turkey and other export destinations—the scrap arisings scenarios may diverge. Unlike in Europe, vehicle sales in North America have rebounded since the 2008 and 2009 doldrums, providing a source of scrap as well as helping some steel mills stay productive.

The biggest question in the U.S. is whether a construction activity comeback is legitimately underway, is it a false start or will it fall victim to political mismanagement?

Ferrous scrap recyclers in the U.S. will likely appreciate it if policy decisions lead to a few more trucks crossing their scales.

 

The author is editorial director of Recycling Today Global Edition and can be contacted at btaylor@gie.net.

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