Business owners and managers in the recycling industry started 2020 with budgets and expectations that almost certainly considered numerous variables that could affect supply, demand and pricing. A global pandemic likely was not one of them.
After reading about the SARS-CoV-2 virus that causes COVID-19 and its impact on human health and society in China, and then Italy and other parts of Europe, March 11, 2020, the notion that COVID-19 was about to change America became a reality. That was the day sporting events started being canceled and Americans found out Hollywood power couple Tom Hanks and Rita Wilson were COVID-19 positive.
During the next 12 months, recyclers experienced material volumes and prices that moved rapidly up and down, matching the uncertainty of social distancing restrictions as virus caseloads rose and fell.
The deployment of vaccines in the first quarter of 2021 is providing hope for the health and safety of Americans—and the economic projections of recyclers. How a rising vaccination rate and a potentially inflationary climate will affect the recycling industry provide new sources of uncertainty as recyclers prepare to leave behind the eventful prior 12 months.
Working through the volatility
Maintaining a profit margin remains the core mission for private-sector recyclers of all materials, but the path to doing so for processors and traders has required quick decisions in the COVID-19 era.
Business managers of processing companies concentrated on matters such as acquiring “essential worker” status, plus sufficient hand sanitizer and face masks. Acquiring technology to work from home also emerged as a priority. These were circumstances that were not part of the landscape before March 2020.
Workplace restrictions and factory shutdowns meant processors and traders were confronted with considerable reductions in the availability of material. In some markets this matched declining demand for finished goods, but in consumer packaging-related sectors, such as aluminum used beverage cans or old corrugated containers (OCC), the scant supply was soon met with rising prices.
Overall, the second quarter of 2020 was one of dramatic economic contraction. By the time Recycling Today surveyed its metals recycling sector readers in July for its 2020 State of the Scrap Recycling Industry supplement, 67 percent of those responding reported lower volumes in the second quarter of 2020 compared with before COVID-19.
At a May 20, 2020, Zoom roundtable meeting that also was part of our State of the Scrap Recycling Industry, panelist Matt Kripke of Kripke Enterprises Inc., Toledo, Ohio, said, “Those of us that take orders for an entire year in advance based on where our projected flows are, the scrap is not there to fulfill our commitments.”
That conversation occurred shortly after one benchmark U.S. industry indicator, weekly steel mill output as measured by the Washington-based American Iron & Steel Institute (AISI), hit a record low of 1.14 million tons, with mills operating at 51.1 percent of capacity.
Industry statistics and recyclers’ assessments have pointed to the ramping back up of scrap supply and global demand. Asked about material flows in February of this year compared with February 2020, one metals processor tells Recycling Today of a year-on-year increase in volume, while another says, “We are getting very close” to pre-COVID levels.
Two others in the metals sector cannot claim that big of a rebound, with one trader saying as of February, “Our scrap volumes were down around 20 percent from 2020.”
A processor gives the identical volume decrease figure, but adds, “Pricing on zorba has more than doubled, and aluminum and copper and steel price jumps have been very helpful.”
John Shegerian, president of California-based multilocation electronics recycler ERI Inc., says, “February 2021 yielded inbound material volumes that were significantly greater than February 2020. There had been a downturn during the early COVID months, but we have gained that all back, plus more.”
An outlier in the February comparison picture is Dallas-based Texas Recycling, a buyer and processor of OCC, other scrap paper grades, metal and plastic that is profiled starting on page 36 of this issue. That firm’s CEO Joel Litman says its volume issues were not COVID-related, however, but caused by Texas’ turbulent weather and power outages that month.
“Approximately 30 percent of February’s working days were lost because of plant closures,” he says. “The company was on pace in early February to outperform February 2020. The month did finish on an upbeat note, and the momentum is carrying over into March.”
Of bullwhips and hypodermic needles
Positive momentum largely is what business owners and managers want to experience. Even before the economy had emerged from the worst of its woes in the spring of 2020, however, commodities analyst Jason Schenker of Texas-based Prestige Economics pointed to the possibility of a commodities pricing “bullwhip” effect as national economies rebounded after COVID-19 restrictions lifted.
Much of what Schenker predicted has come to pass as China and then other nations began rebounding from their earlier, most severe reactions to reduce the spread of the virus. For many recyclers, the upward price momentum in their markets yielded benefits in the form of increased material flows and rising inventory values.
With health and safety, several of the recycling executives contacted say their companies will be encouraging vaccination among their staff members. (See the sidebar, “Seeking immunity.")
Contacted 10 months after his May 2020 roundtable participation, nonferrous trader Kripke says, “Our expectations are that the tightness in metal begins to subside and spreads widen a bit as the year goes on. We expect volumes and margins to be very strong in the second half.”
A metals processor based in the Midwest says, “Volumes have been picking up in many areas, and year over year, 2021 has been a bit stronger all the way around. The biggest driver is the recovery of postshredder product demand and pricing.”
”The company was on pace in early February to outperform February 2020. The month did finish on an upbeat note, and the momentum is carrying over into March.” – Joel Litman, president, Texas Recycling
“I expect that the COVID recovery in the coming months will restore volumes, and we could have a banner second half of 2021,” says David Caffee, a partner of Maryland-based Atlantic Recycling Group.
Electronics recycler Shegerian sounds the most bullish of all, stating, “The second half of 2021 is looking particularly strong for us. In terms of spikes in processing activity, hiring and business travel, we are preparing for significant increases in all three. Volumes have already increased massively; we are hiring more employees at this very moment, and our business travel is about to explode to a level exceeding all previous levels of activity.”
Several other recyclers refer to bolstering their workforces in the second half of 2021, which was considered a sizable challenge even during the depths of the pandemic, according to Recycling Today May 2020 roundtable participants.
Affluence, but aggravation?
As scrap supplies diminished in the second quarter of 2020, trader and consultant Nathan Fruchter of New York-based Idoru Trading Corp. reminded Recycling Today on multiple occasions that “scrap is a product of affluence.”
He correctly predicted that scarce scrap supplies would lead to rebounding prices as demand returned.
As the global and U.S. economies enter a likely rebound in the second and third quarters of 2021, the return of supply and accompanying volatile prices could bring some high margin opportunities but also some recurring headaches.
On the operations side, a shortage of shipping containers and escalating freight prices have been trends that started in the third quarter of 2020. One metals recycler says container and booking availability in mid-March is “as bad as ever” and is affecting inland locations at least as much as Atlantic and Pacific coast ports.
As vaccine programs were just starting to make inroads, economists and metals industry analysts already were expressing concerns about inflation, particularly within the commodities sector.
In the second week of March, Bloomberg reported that Richard Adkerson, the CEO of global mining firm Freeport-McMoRan, referred to current conditions as having “a degree of an echo” of previous copper price spikes.
Adkerson, who spoke at a Fastmarkets AMM event, said the higher prices this time will be accompanied by few additions to mined supply, potentially putting more upward price pressure on the red metal.
That potential supply shortage was backed up by Jeremy Weir of Australia-based Trafigura, speaking at the same event, who is forecasting a global copper supply deficit “in the region of 10 million metric tons” by 2030.
For copper scrap traders, excessively high prices can create helpful margins but also greater risks and some operational aggravation. The risk can come in the form of sudden downturns that can cause scrap to lose value while it is still in a warehouse or on a long ocean voyage, while aggravation on the operations side can involve higher credit insurance prices and increased theft incidents and law enforcement scrutiny.
Inflation alerts have been sounded by many economists examining government budget deficits and rising retail prices. For the Arlington, Virginia-based Associated General Contractors of America (AGC) and its construction industry members, rising materials prices are a concern.
In mid-March, AGC CEO Stephen E. Sandherr says, “Contractors are caught between a pandemic market that isn’t willing to pay more for projects and materials prices that continue to spike. Construction firms won’t be able to thrive if rising materials prices continue to shrink already pressured profit margins.”
For recyclers, it is a reminder of the old saw “the cure for high prices is high prices.” Previous bull markets for metals typically have met their match when manufacturers seek lower cost materials substitutes and construction projects receive a red light because of cost issues.
In the near term, however, after 12 months of intermittent pandemic-related health concerns and materials scarcity, recyclers sound excited to be able to contend with issues pertaining to busier facilities and rising commodity values.