Avoiding the worst

Features - Ferrous Commodity Focus

Even after one of the worst economic quarters in history, ferrous scrap has been able to hold onto much of its value.

December 15, 2020

Photo by Brian Taylor

The Commodity Focus feature on the ferrous scrap market in this year’s May issue of Recycling Today was titled “A wild ride” and portrayed an immediate post-COVID-19 market with considerable price volatility.

Fortunately for ferrous scrap processors trying to maintain a steady margin, the second half of the year has been more like the last 30 seconds of a typical roller coaster: a smooth glide back to the platform that allows riders’ pulse rates to drop back to a healthier level before they depart the ride.

In the case of the scrap market, prices have stabilized in the $300 per ton range for prompt and shredded scrap and closer to $265 for heavy melting steel (HMS) as measured by the Raw Material Data Aggregation Service (RMDAS) from Management Science Associates Inc. (MSA), Pittsburgh.

The stable, medium-level prices seem to indicate that the market has been in a post-COVID, slowly developing rebound featuring matching supply and demand.

Scrap processors and traders likely are holding their collective breath that they can make it one more trading period in December before being able to look back and think, “A lot of other industries had it much worse.”

There was shrinkage

In a late April issue of the news magazine The Economist, a feature story titled “The 90 percent economy” examined the COVID-19 landscape. While ferrous processors and traders may be glad they have been able to retain a margin much of this year, many also would be happy to have lost only 10 percent of their volumes.

As the United States has shifted from widespread restrictions to reopening to figuring out how to cope with subsequent waves, the ongoing struggle of several industrial sectors has meant pinched scrap flows from specific sources. The end result for ferrous scrap buyers has been an inability to reach prepandemic levels.

While the public has returned to buying new vehicles if necessary or desired, overall driving miles remain lower because more people are working from home and are taking fewer vacations. Fewer miles and trips mean longer vehicle life, bringing fewer cars into dismantling yards.

The energy sector has remained at low idle throughout the last three quarters of the year. At the Recycling Today State of the Scrap Recycling Industry Roundtable in mid-May, Becky Proler of Houston-based Southern Core Recycling discussed how the energy sector seemed to have changed dramatically overnight.

“Speaking from Texas, which is oil country, we had two things happen to us,” Proler said. “We had COVID and then we had the fall in oil prices, so industrial accounts are down here probably 60 percent, and they’re not looking like they’re going to come back quickly,” she added.

Subsequently, the “rig count” of drilling activity cataloged by Houston-based Baker Hughes and the American Oil & Gas Reporter website shows the struggles of that sector this year. On March 13, Baker Hughes reported 792 working oil rigs in the U.S. Four months later, on July 17, that figure had plummeted 68 percent to 253 working rigs.

A second-half 2020 rebound in operating rigs has been at a sluggish pace, with the working rig count having made it back only to 300 (exactly) Nov. 6.

While the scrap recycling sector has not been as hard hit as the energy, hospitality or aerospace sectors, the ripple effects of the brutalized portion of the economy have been reflected in reduced scrap flows.

By fall, recyclers were using phrases like “a little busier now but not crazy busy by any means” when talking to Recycling Today about flows into their facilities. None have mentioned a return to prepandemic volumes.

An essential material

The springtime requirement to establish itself as an essential industry appears to be in the rearview mirror for recyclers, and global steelmaking figures seem to indicate steel is playing a role in the world’s attempt to revive economic activity. If household consumers, including those laid off from their pre-COVID-19 jobs, cannot fully revive a national economy, governments in many parts of the world have determined that infrastructure spending can help make up the difference.

China has ramped its infrastructure spending back up to bolster economic activity. The result was that China, which makes half of the world’s steel, produced 4.5 percent more steel in the first three quarters of 2020 compared with that period in 2019. The ripple effect of China’s activity could cause more harm than good for steelmakers and scrap recyclers in the U.S. if Chinese-made steel starts getting shipped out to other countries.

By mid-October, the American Iron and Steel Institute (AISI), Washington, pointed to this possibility. In late October, AISI joined with steel industry associations from other parts of the world in expressing “tremendous concern about the recent increase in steel overcapacity at a time when steel demand is severely depressed by the COVID-19 pandemic.”

When it comes to steel import concerns, reality does not always seem to match the fear, however. In the first nine months of this year, steel imports into the U.S. were down 21.9 percent, according to AISI. That drop actually exceeds the 18.9 percent decline in domestic steel output in the first nine months of 2020. (Steel imports from China are down 39.4 percent year to date.)

Ferrous scrap buyers in several other nations have remained in the market in 2020, in part because of government efforts to use infrastructure projects as an economic life preserver.

In the first five months of 2020 (as far forward as statistics are available from the United States Geological Survey, or USGS), Turkey had purchased 1.55 million metric tons of material. That represents a 13 percent increase in purchases from the nation.

Also still very much in the market have been Mexico, at 871,000 metric tons, up 56 percent from its 2019 pace; Malaysia, at 774,000 metric tons, soaring 89 percent above its 2019 pace; Taiwan, at 707,000 metric tons, holding steady at its 2019 purchasing level; and Bangladesh, at 603,000 metric tons, rising 73 percent year to date.

A purchaser on the rise has been Pakistan, a buyer of 259,000 metric tons of ferrous scrap in the first five months of 2020, up 34 percent from its 2019 pace. That nation’s government, increasingly in the orbit of China’s One Belt – One Road efforts, likewise has spent big on infrastructure.

The export activity likely has helped buoy scrap prices in a domestic market where steel output has drifted back slowly from its late April and early May trough.

As recyclers and traders head into 2021, uncertainty remains in the room as economic, geopolitical, domestic political and public health issues all remain in flux.

The way we were

By mid-2009, several months after the subprime mortgage crisis had eviscerated economic activity in the U.S., recyclers and other business owners were seeking ways to get back to revenue and activity levels that would match “precrisis” figures. In late 2020, the phrase “prepandemic” can be substituted for a similar frame of mind.

Based on the earnings reports of recycling and electric arc furnace (EAF) steelmaking firms, those activity levels are not there yet. However, the better news is that many recycling and EAF steelmaking firms accustomed to volatility have been able to manage profitably this year.

Irving, Texas-based Commercial Metals Co. (CMC) completed its 2020 fiscal year Aug. 31 with net income of $67.8 million. Although that figure was down about 21 percent from the company’s prior fiscal year, CMC President, CEO and Chair Barbara R. Smith said CMC faced “unprecedented challenges” this year.

Portland, Oregon-based Schnitzer Steel Industries completed its fiscal year on the same date as CMC and reported an operating profit for the quarter but also a small net loss for the year. The company says its fourth quarter, running June through August, saw it post an $11 million operating profit and a $4 million net gain. “Our fourth quarter operational and financial results, as well as our full-year results, reflect the agility of our team, the strength of our culture and the resiliency of our platform,” Schnitzer Chair and CEO Tamara Lundgren said in remarks accompanying the results.

In mid-November, investors and business owners were confronted with the following potential pitfalls: a rising COVID-19 caseload that could spark new shutdowns; a November election with at times unclear results other than a remote chance of a Washington consensus on issues including infrastructure spending, energy policy or health insurance; and geopolitical strains with the potential to affect overseas scrap markets in several places, including Turkey.

The ferrous scrap sector can look back with pride and relief regarding how it coped with 2020. However, it will only be able to look back briefly before dealing with current challenges.

The author is the senior editor with the Recycling Today Media Group and can be contacted at btaylor@gie.net.