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Muddling through

Features - Commodity Focus

The ferrous scrap sector continues to bear the brunt of global demand and supply issues.

Brian Taylor March 6, 2014

Economic statistics gathered and distributed in Europe finally point to slow and steady economic growth, but the faint pulse of an economic rebound does not seem to be making a healthy patient out of the ferrous scrap industry there.

In the words of one London-based scrap broker, the illness that comes to mind in connection with recent scrap market conditions is diabetes.

“My personal feeling is that economies of efficiency and capacity have been so stretched that the scrap metal business has almost become like a case of diabetes—once you get it, it is hard to get rid of,” says Diwakar Gautam of Sunberg Limited.

Extending his diabetes metaphor, Gautam says those in the industry need not perish from their condition. They are “affected by a multitude of rapidly changing parameters, [but] you can live with it if you manage it well.”

Gautam is not alone in seeing the remainder of 2014 as producing more of the same in terms of austere scrap flows and a slow pace of activity in the ferrous scrap sector in Europe.
 

Limited supplies

Since sub-prime mortgages began pummeling the balance sheets of European banks in 2007 and 2008, the construction sector throughout most of Europe has been a foremost victim of the financial crisis.

Following close behind the lending industry meltdown were government austerity programs adopted in several EU nations, which provided a further decrease in construction and demolition projects. The result has been a sharp reduction in ferrous scrap generated by building activities.

If scrap generation is going to improve in Europe in early 2014, it has not been especially noticeable to recyclers in the first few weeks of the year. “There are no indications of an increase in scrap arisings despite a very mild 2013,” says Gautam. “It appeared by the end of 2013 that people were putting off action or holding onto hope that 2014 will change things,” he continues, “but apart from the digit 3 changing to digit 4 [on the calendar], not a lot changed as far as volumes.”

EU steel on the rebound?

A survey of steel industry analysts and forecasters shows that the majority see 2014 as a year when steelmakers in nations beyond China will experience greater demand for their products.

A mid-January 2014 compilation of forecasts gathered by the Financial Times shows optimism regarding steel production figures in Europe and some other parts of the world, “offsetting a slowdown in Chinese growth.”

The Financial Times survey of 15 steel industry analysts pointed to a global steel production rise of 3.6% in 2014. Although the analysts foresee Europe’s steel industry rebounding after six years of decline, their predicted growth rate for 2014 remains below the global average.

“A 2.4% year-on-year increase in output in Europe will partly offset a slowdown in China, as the world’s biggest steel producer moves from an investment to a services-driven economy,” says the newspaper.

Steel output in China is tabbed at 4% (based on averaging out the 15 forecasts), down from a 6% growth figure in 2013.

Among parts of the world with new furnaces and mills coming online that may lead to greater national output are India, Gulf Cooperation Council (GCC) nations, some former Soviet Union countries and some Latin American nations.

Rolf Willeke, who is statistics advisor to the Ferrous Division of the Bureau of International Recycling (BIR), Brussels, maintains some optimism for 2014, if only to help erase the memory of 2013. Says Willeke, “2013 was a bad year for our industry [but] at the moment we have the feeling that the availability of steel scrap is improving.”

Ferrous scrap generation has been especially slow the past several years in southern Europe, where Ruggero Alocci brokers scrap with Alocci Rappresentanze Industriali, Genoa, Italy. Alocci is aware that forecasters are anticipating a modest recovery in 2014, but he is not certain to what extent it will help scrap processors in nations such as Spain and Italy.

“Rising labour costs and a strengthening euro could again hurt the EU’s competitiveness, while the political instability in some countries poses a threat to a fast sustainable recovery,” observes Alocci. “Consequently, 2014 is foreseen as a little better than the previous year, but without significant growth,” he adds.

The construction and demolition sectors, long dormant, are not viewed as likely to boost ferrous scrap generation significantly by sources contacted throughout Europe. “At the moment it is difficult to see a better situation for the demolition sectors in Europe,” Willeke says.

Gautam says bluntly, “Europe is in no stage of a construction and demolition boom in activity.” He says in the United Kingdom “there are isolated pockets of activity,” such as London, but adds, “these are not indicative of Britain as a whole. Demolition activity is slow because the economics don’t work out in favour of it.”

In searching for something positive to say about Europe’s ferrous scrap market, the notion of balance is offered, since weak supply has recently been coupled with weak demand. “Scrap arisings and mills demand are well-balanced,” Alocci says as of early February, “and the winter is, so far, not influencing scrap transport.”

Weak demand for the EU’s ferrous scrap has been coming not just from Europe but also from some of its traditional export markets.
 

Demand deficiencies

Processors and brokers in the EU who do have ferrous scrap to sell are often finding fewer bidders for that scrap on the global market.

Willeke says each of the EU’s biggest overseas buyers of ferrous scrap have been curtailing their purchasing habits, according to figures covering the first three quarters of 2013.

“[2013] was a difficult year for scrap exports from the EU,” Willeke comments. “At the moment I am not seeing that the situations of the main buyers of EU steel scrap will be changing in early 2014.”

By volume, Turkey is by far the largest export destination for ferrous scrap from the EU. According to figures Willeke collects from German steel federation WV Stahl and other European organisations, however, Turkey was on pace to import 10% less ferrous scrap from the EU in 2013 compared with 2012. (This was after data for the first nine months of 2013 had been recorded.)

Willeke says Turkey’s volume drop has been the greatest, while the percentage drop for the next two largest EU ferrous scrap importers, India and China, has been even higher (See chart, below right.).

“These reductions could not be compensated through greater deliveries to Egypt (1.29 million tonnes through September) or to Pakistan (0.37 million tonnes through September),” says Willeke.

From his vantage point in London, Gautam says overseas buyers continue to make inquiries but will not buy at any price. “Export buyers are aggressively searching as always, but without the workable prices,” he comments. In many emerging markets, he adds, “slow worldwide activity [for manufactured goods] is affecting their local economies.”

In 2009 when global ferrous scrap demand and pricing fell, Chinese steel mills came into the market and purchased additional scrap to help feed their always-hungry basic oxygen furnaces. Recyclers are not convinced that particular bit of history will repeat itself, however.

The Chinese government has set a target to consume more than 100 million tonnes of ferrous scrap per year by 2018, Willeke, says, however, he adds: “It is notable that for steelmaking China will be using more domestically supplied steel scrap and reducing its imports.”

Willeke says in the first nine months of 2013, China’s steelmakers “increased their steel scrap usage (up 2.7% to 64.3 million tonnes) but reduced their scrap imports (down 11% to 3.46 million tonnes).”

Gautam expresses concern that China’s era of roaring, always-growing annual steel production figures may be about to end.

“China looks very unlikely to get aggressively into the ferrous scrap markets, and it appears to me that local capacity control in China is driven by policy makers making it harder to operate,” he comments.

Gautam also points out that China’s policy to weed out older, polluting steel mills may go hand in hand with the country’s efforts to tighten the lending market for construction projects—meaning less structural steel would be necessary.

Forecasts for Europe’s steel sector are largely calling for more output in 2014 compared with 2013 (See the sidebar “EU steel on the rebound?” above). However, a low-single-digit percentage rise in steelmaking would be tied to a very modest base of output in 2013.
 

Surprises welcome

If the ferrous scrap market—and the overall economy of the EU—is to rebound later in 2014, it will come as a surprise to recyclers and traders who have become skeptical about the state of the global economy.

Looking at charts of prior recessions and recoveries, somewhere in the recovery phase there was typically an upward spike for several economic quarters when factories surged to life to catch up with newly resurgent demand. That spike has been anticipated for several years now but has yet to materialise.

Economists disagree as to what role consumer or manager sentiment plays in a rebound, but one bit of good news may come in the form of improved levels of confidence toward the end of 2013.

“In December [2013] the Economic Sentiment Indicator (ESI) increased by 1.6 points in the euro area (to 100) and 1.4 points in the EU (to 103.5),” notes the European Commission (EC) in a January 2014 news release. “Sentiment in the euro area is thus back to its long-term average for the first time since July 2011,” the EC news release continues.

A graph of this economic sentiment found on the commission’s website (http://europa.eu/rapid/press- release_IP-14-7_en.htm) shows a wavy line that contained a spike in 2009 just to get back to average but that is still awaiting the spike that will indicate a new surge in economic growth. (The chart for the companion Industrial Confidence Indicator in the EU shows an identical pattern.)

It likely will take such a surprising spike in not only in sentiment but also in resulting industrial activity to put European scrap processors and traders back into fast motion.

In hard-hit Southern Europe, Alocci says he does not see such a spike as likely in 2014. “Domestic demand [for steel and scrap] will likely remain weak, as a result of the elevated unemployment and soft wage growth,” he comments. “Consequently, 2014 is foreseen as a little better that the previous year, but without significant growth.”

 


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

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