In late March and early April, as corporations and other large organizations changed their advertising messaging in the wake of the COVID-19 pandemic, many settled on the word “uncertain” to describe the new economic and social environment.
For buyers, sellers and consumers of ferrous scrap, that uncertainty is likely to lead to another term that is familiar in the commodities trade: volatility.
Governments around the world, following the advice of their public health agencies, have shown little reluctance in massively scaling back economic activity. This sudden application of brakes to economic engines already has resulted in steep drops in demand for steel, with ripple effects in global ferrous scrap supply and demand.
To the extent that the remainder of 2020 is predictable at all, a leading storyline almost certainly will involve how governments and corporations restart what has been idled. For steelmakers and scrap recyclers, how that storyline plays out will impact every aspect of their businesses.
As the speed of commerce in the U.S. slowed to a crawl in late March and early April, few economic sectors were left untouched. Following a pattern that had been established in China in February, the consumption of energy was an initial victim, followed quickly by metals.
The plunge in global energy consumption caused by COVID-19-related lockdowns and “shelter in place” orders has led to a widely documented decline in oil prices. The reaction in oilfields around the world was one initial domino that contributed to a decline in demand and pricing for metals.
In the automotive sector, unions wary of exposing their members to the virus and board rooms anticipating a lack of vehicle purchases in the near term reached the same conclusion in terms of idling assembly plants. Automotive component plants followed, continuing a ripple effect that worked its way toward steel output. That last link in the chain presents a difference between the market economies of the world and the state-owned enterprise output of steelmakers in China.
Pittsburgh-based U.S. Steel Corp. and several other steelmakers had to adjust output at their mills in an attempt to bring mill capacity in line with anticipated finished steel demand over the course of the next two months or so. Between March 24 and April 11, crude steel output in the U.S. fell by more than 32 percent, according to the Washington-based American Iron and Steel Institute (AISI). All the factors were in place for a drop in ferrous scrap prices except one—the all-important supply half of the equation.
Slowing to a trickle
Historically, when scrap processors see a severe monthly drop in ferrous scrap prices, they also expect to see accumulated scrap inventory in their yards. When supply outpaces demand, it gives mills negotiating leverage.
In early April, most processors were not reporting that to be the case. By mid-March, scrap yards instead were experiencing a dwindling of inbound material that in theory could more than match even a 32 percent drop in domestic finished steel output.
The one pipeline of scrap that processors tried to keep open was the peddler and small contractor trade. A processor based in the Midwest noted, however, that if scale prices were to fall in early April, that would serve to diminish those scrap flows further.
Although the Institute of Scrap Recycling Industries (ISRI), Washington, lobbied consistently to ensure recycling is considered an essential industry so scrap can keep flowing, some locations have closed owing either to state and local laws or corporate decisions.
If falling scrap demand has been met by an equal or even greater plunge in scrap supply, one might conclude that this form of equilibrium would keep pricing relatively stable.
In early April buying, that did not prove to be the case, with Fastmarkets AMM Midwest Index pricing showing roughly $25-to-$50 per ton price drops in the heart of the country.
According to reports in that publication and others, the low prices were met with resistance by many processors. This faction chose to sell very little scrap at April prices, speculating that mills with scant inventory would be forced back into the market in a big way when governments, companies and households take measures to reawaken the dormant economy, whether that is in May or later.
Bullwhips and bull markets
In mid-April, as COVID-19 casualty figures and economic data painted a sobering picture for many Americans, it was difficult for some to conceive of life after the coronavirus impact. By that time, however, acknowledgements were being made that planning for the postpeak-virus era was growing in importance, and government and business leaders alike signaled that they were shifting their attention.
Commodity and investment analysts had been predicting a “bullwhip” effect starting with China’s experience with COVID-19. Downward pricing was predicted March 2 by Jason Schenker of Austin, Texas-based Prestige Economics. At that time, Schenker mentioned the possibility of a “bullwhip effect,” in which “a small move of the wrist turns into a big crack extending beyond China.”
As COVID-19 “shelter in place” orders hit Europe and then North America, exchange pricing for copper and aluminum tumbled to lows not hit for several years. Prices for steel and stainless steel were similarly affected by those orders and rapidly disappearing oilfield activity.
By early April, another investment analyst and advisor was pointing to the possibility of the bullwhip cracking in the other direction once economies in Europe and North America follow China in returning to a post-COVID-19 setting.
April 1, John Browning of Shanghai-based BANDS Financial writes that Goldman Sachs had warned that the economy in the United States “will go through an unprecedented drop” in the second quarter of 2020 but then “will be followed by a recovery that would be the fastest on record.”
Browning also writes that supply cuts in mined ores and primary metals mean that if the bullwhip cracks back to intense demand, prices would rise sharply in the absence of adequate supply. He cites this April 1 observation from Australian bank Macquarie: “As base metals prices test lows and governments curtail activity, a growing number of production assets are going offline, temporarily or indefinitely.”
In his April 1 email to clients, Browning writes, “The message from the fractured supply lines in metals is that demand is falling, but supply is falling also, so that we must expect short but painful disruptions in available location quality and delivery date. If we were to add this to Goldman’s expectation of a sharp recovery in Q3, it would seem we have the ingredients for an incendiary inflationary cocktail in the commodity space.”
That scenario could create a feast after the famine for scrap recyclers. With a sharp recovery, processors ideally can receive attractive prices on any existing inventory. Following that, recyclers can put their supply elasticity benefit to work by drawing in increased peddler scale traffic as prices rise and metals producers seek feedstock. As those same processors and traders struggle in the current low-supply and low-price environment, the idea of such a rebound presents a glimmer of hope.
The author is senior editor with the Recycling Today Media Group and can be contacted at firstname.lastname@example.org.
Through the generations
Features - Cover Profile
Brothers Brent and Zack Kirstein of 4G Recycling Inc., Deerfield Beach, Florida, carry their family’s commitment to recycling and customer service into the fourth generation.
Brothers Brent and Zack Kirstein of 4G Recycling Inc., Deerfield Beach, Florida, prioritize being honorable and responsive as core values. The firm, which manages waste and recycling programs for clients throughout North America, markets in excess of 450,000 tons of recyclables annually for printers, envelope manufacturers, paper mills, converters, distribution centers and supermarket chains.
While the brothers formed 4G Recycling Feb. 1, 2012, they say the Kirstein name and the family’s commitment to integrity, service and timely payments extends back to 1910.
Rooted in recycling
The brothers say the Kirstein family has been involved in the recycling industry since 1910, when their great-grandfather Phillip Kirstein began searching the New York City streets for textiles, metals, newspapers and other recyclables to resell. In 1930, Phillip relocated his family to Connecticut, and his eldest son, Abraham, joined the company, which was named United Paper & Metal at that time. In 1965, Harold, Abe’s son and father to Brent and Zack, started working in the family business, helping to expand the company throughout New England. The brothers joined the family business, then named American Recycling, in the late 1990s, learning the business from the ground up.
In 2008, Greenstar NA, which was owned by Ireland-based NTR PLC, purchased American Recycling’s assets. Brent and Zack transitioned to Greenstar, where they held management positions and learned global business structure and strategy.
The brothers’ desire to continue their family legacy in the recycling industry and to build a company that would be around for their children led them to start 4G Recycling in 2012.
“We started the company with one account out of our living room,” Zack says. “Today, 4G is servicing almost 500 locations in 48 states and marketing 450,000 tons per year to mills around the world.”
“Our exponential growth is a function of our attention to the suppliers’ needs, quality service and timely payments for recyclables,” Brent adds.
While the company exports recyclables to 13 countries, he says a large percentage of its sales are to domestic consumers. “We are U.S. based and recognize the important symbiotic relationship with the American paper industry.”
Building on tradition
American Recycling specialized in high-grade recovered fiber, which is a tradition that Brent and Zack have built on at 4G Recycling.
“It’s what our dad really did well,” Brent says, adding that American Recycling had a significant share of the New England printing and packaging market.
4G got its start in high grades shortly after the company formed, he says. It partnered with National Envelope, now owned by Cenveo Worldwide, to improve the company’s material handling processes with new equipment and a strategy that significantly increased its bottom line. 4G quickly found itself handling thousands of tons of hard white and plastic-window envelopes. In a short time, the company added a large paper converter to its customer roster, and thousands of tons of unprinted solid bleached sulphate (SBS) board were processed through an air-trim removal system that 4G installed and financed.
Today, Brent says, deinking grades and pulp subs account for roughly 70 percent of the company’s overall paper tonnage.
2019 proved to be a historically low year for the recycling industry, specifically for high-grade recovered fiber. The brothers say they believe the decline in the high-grade market was largely because pulp markets lost 50 percent of their value. In light of oversupply and weak demand, pricing for deinking grades and pulp substitutes plummeted.
“Understanding high-grade paper and marketing substantial tonnage has helped 4G foster great mill partnerships that solidify 4G as the go-to supplier for top-quality high grades,” Brent says. “One mill may not be able to take SBS board, another may take only soft white. One might like autotie bales, and others might be OK with downstroke bales. We understand what mill customers need, and we provide the right supply for their products.”
“Today, our business is comprised of 70 percent fiber, 15 percent plastic, 5 percent metals, 10 percent solid waste and tertiary services,” Zack says.
Low-density polyethylene (LDPE) accounts for the bulk of the plastics 4G handles, Brent adds. “We receive this grade from retailers, grocery chains, distribution centers as well as other recyclers that come to us due to our marketing partnerships and logistics expertise with spotting equipment for lower volumes.”
4G sells the bulk of its recovered LDPE to reprocessors that sort out contaminants and turn the material into pellets that are used to manufacture containers, plastic bags and building products, he adds.
“Other grades that we buy a lot of are PET (polyethylene terephthalate) bottle and sheet, EPS (expanded polystyrene), HDPE (high-density polyethylene) natural and colored,” Zack says.
Keeping things moving
The company contracts directly with trucking companies to transport nearly 70 percent of the material it sells, Brent says, moving an average of approximately 200 trucks per day.
Many of 4G’s recycling partners that process its material also provide transportation services for the company.
Brent says, “We don’t want to own a single truck. It’s too many headaches, and we prefer to outsource our logistics to local trucking firms in each market, which enables us to provide service excellence in all market areas.”
“We made the decision when we started the company that we wanted to be nimble and innovative,” Zack says. “We provide incremental tonnage to recycling facilities that is processed at wholesale rates. This combined with 4G’s mill partnerships enable us to provide the maximum rebate structure for our clients. Our business model is based on economies of scale and generating the cleanest possible material.”
Brent says the last year has helped to illustrate how important it is to keep its customers’ tons moving, even when markets may not exist. “Like our industry peers, the market dynamics of 2019 created many challenges, such as maintaining movement with a reduction in available sales orders,” he says.
“We take our obligation to maintain movement for our suppliers very seriously and at one point we had 15,000 tons stored in our warehouses,” Zack says.
For example, 4G stored several clients’ groundwood scrap in its Savannah, Georgia, warehouse because demand for that material was nonexistent for a while last year. “We recognized that we had to keep servicing no matter what,” Brent says. “It’s how we run our business with the customers’ needs first. We view our partnerships over the long term, and we make short-term sacrifices when necessary to ensure business continuity for our customers’ operations,” he explains.
“It’s all about customer service,” Zack says. “We guarantee our suppliers movement regardless of market conditions.”
Prior to the COVID-19 outbreak, the movement of recovered fiber was on track to remain challenging throughout 2020, particularly on the West Coast, given the uncertainty with China and whether it really will ban recovered fiber imports in 2021 and because emerging markets lack the capacity to handle all the U.S. material that traditionally has been exported, the brothers say.
“The exception to these West Coast markets is high grades, which we feel will continue to gain stability due to an increase in demand from Mexico, partially related to the new USMCA (United States-Mexico-Canada) agreement and the global pulp industry stabilizing,” Brent says.
Zack says that while India had been increasing its recovered fiber purchasing off the West Coast, which was improving premiums and available orders, that changed with the COVID-19 pandemic. “India canceled all orders abruptly,” he says, noting that the country was locked down for three weeks as of March 24 to contain the spread of COVID-19. As of press time, that lockdown has since been extended to May 3.
The COVID-19 outbreak has added to the challenges that have been affecting markets. The outbreak, which is thought to have originated in China in December of last year, led to shipping container shortages in areas of the U.S. and reduced shipping capacity.
Brent says 4G’s strong financial position will help it weather the COVID-19 outbreak and other challenges in the recovered fiber market. “We care about our people and have a strong workforce,” he says. “We’re taking pay cuts ourselves to keep as many people employed as possible.”
“We have invested in our people to develop one of the best leadership teams in the industry,” Zack says. “We collaborate weekly on the state of the company and make smart decisions on what growth opportunities to pursue. We have hired business coaches to help mentor employees to be the best service provider in the recycling industry.”
Exploring its options
4G purchased its Deerfield Beach headquarters in 2018 after ensuring it was zoned for expansion. Brent and Zack say the site has additional acreage on which to build, something they want to do in 2021.
In addition to adding office space, 4G has plans to work with software developers to fine-tune its custom customer relationship management (CRM) tool and bidding platform, potentially licensing or selling the applications so its peers can benefit from these systems, Zack says.
4G worked with developers to create RecyclingBid.com, a bidding platform it plans to use for its large clients. Brent says 4G has beta tested the software with a client. Using RecyclingBid.com resulted in 4G’s customer realizing more than $1 million in increased revenue compared with the previous year.
“Other online bidding platforms don’t seem to understand the dynamics of the recycling industry and are too cumbersome and inefficient,” he adds.
Zack says, “We take great pride in being outside-the-box thinkers and pushing the envelope to maximize efficiency for our clients and internally.”
4G’s custom CRM software was developed to streamline the company’s sales process and internal workflow. “Our custom-designed system holds 4G’s sales team to a high level of accountability regarding their decisions,” Zack says.
In addition to these projects, Brent and Zack say they have not dismissed the possibility of growth through acquisition, whether by purchasing another scrap brokerage firm or even a recycling plant.
“We want to be 5G,” Zack says, referring to passing the business on to the next generation of Kirsteins. “We want to keep growing this business.”
The author is editor of Recycling Today and can be contacted at email@example.com.
The growth of EAF steelmaking
Features - Steel Industry Update
Electric arc furnace steelmaking is expected to grow as the industry focuses on carbon neutrality.
After holding at approximately 25 percent of global steelmaking production for about a decade through 2012, the migration to electric arc furnace (EAF) steelmaking accelerated during the past seven years.
EAF steelmaking production hit a new high in 2017 with a 7.5 percent year-over-year increase. That was followed by an additional 12.3 percent increase in 2018, meaning EAFs accounted for almost 404 million metric tons (445 million short tons), or 29 percent, of the 1.8 billion metric tons (1.98 billion short tons) of steel produced globally.
While the final numbers for 2019 haven’t been released as I write this in February, I expect EAF production increased year over year but potentially lost 0.1 percent of market share. This is because Turkish capacity that is largely EAF based operates as “swing” supply and was down 9 million metric tons (9.92 million short tons), or 22 percent, compared with 2018.
The key to carbon neutral
Looking forward over the next decade, EAF steelmaking production will be a big winner in the race to produce “green,” “carbon neutral” steel. European steel producers have worked diligently over the past two decades to reduce the carbon footprint of the steel produced through traditional integrated steelmaking, having accomplished the lowest levels possible from a scientific perspective. The only path available to them to further reduce their carbon emissions is to shift to EAF production using alternative metallics, diverting large capital investments that would have been used to sustain their blast furnace/basic oxygen furnace (BF/BOF) production with EAFs.
Two challenges to this long-term strategic plan remain unresolved, however.
First, if the electricity used to power EAFs isn’t carbon neutral, changing from BF/BOF production to EAF production just shifts the climate impact from the steelmaker to the energy generation operation, resulting in no ultimate reduction of the carbon footprint. This makes the benefit questionable compared with the great aggravation and disruption that making the shift to EAF production would create. Thus, many European producers are aggressively seeking to “go green” with their entire energy generation systems. Some European countries are farther down the conversion path to clean energy than others, taking advantage of water, wind and other natural resources.
Because this is a culturally inspired commitment rather than a market-driven one, in conjunction with these steel production shifts, the European steelmakers are seeking to protect their markets by exploring the possibility of a carbon “border tax” for steel coming into their markets that hasn’t been produced using the same climate-conscious constraints.
Additionally, some marketing efforts are underway to develop premium “clean steel” brands in an attempt to segment the global market into “environmentally friendly” steels compared with “environmentally unfriendly” steels that have been produced through lower cost steelmaking methods that don’t take as much care for the impact of their processes on the environment.
It remains to be seen if these efforts move from the drawing board to purchase orders, but I would posit that it’s a serious endeavor that has been prioritized with resources and attention and is more likely to happen eventually.
This leads to the second hurdle: There isn’t enough scrap metal in the world to feed these furnaces. EAF steelmakers most likely will operate more along the lines of a BOF process using some form of preprocessed iron ore. This is why raw material suppliers, including the likes of Cleveland-Cliffs Inc. in the U.S., are building capacity to supply the anticipated need.
EAF-based steelmaking production in the U.S. accounted for 70 percent of the total steel produced in 2019, and the scramble to identify appropriate feedstock has been an issue in the country for the better part of a decade. The world is well-behind the U.S., but if the Europeans switch one-third of their production capacity en masse throughout the next eight to 10 years, that need is going to turn critical for them almost overnight. Direct-reduced iron (DRI) hasn’t been in shortage globally since 2008, but it is more challenging to source than regular iron ore, and smart producers are taking steps to secure supply well before that potential crisis develops.
The scrap effect
What does this mean for scrap suppliers?
Given the pricing of ferrous scrap over the past 12 months, you wouldn’t suspect potential for supply tightness in the market. Part of this market softness is because of the aforementioned dramatic drop in production in Turkey in 2019, which again represents swing demand for the global steel and scrap markets. But the main cause is bigger than that.
The market perception has shifted, and now scrap is thought of as a “second class” supply of raw material. What I mean by that is in the 1960s and 1970s, a huge reservoir of scrap was available in the United States, which facilitated the rise in EAF steelmaking capacity and caused everyone great pride that we were recycling our steel scrap and protecting the environment by making new steel with a much-reduced carbon footprint compared with integrated steelmaking production. Somehow, and I’m not sure I understand how, but scrap since has been branded as dirty and polluting and as a waste product rather than as a preferred source of metallic supply. It’s a false negative branding and many organizations are pushing back against the perception, but it’s a real enough challenge.
The more “real” physical challenge is that as the percentage of EAF steelmaking increased in the U.S., the residual level of the scrap reservoir has increased exponentially, making scrap more expensive to use because of the additional sorting and screening necessary to remove the “pollutants,” thus reducing the “value” in the scrap itself and allowing, even forcing, the development of additional supply sources for the required raw material.
Despite the current low price signaling otherwise, the market need for scrap products will increase.
With the anticipated demand from Europe, it is incumbent upon the scrap industry to find a way to reposition its products as climate friendly and green. If I had a good “insight” on how to make that happen, I’d be living on an island right now.
Finally, we consider China, as no conversation is complete without it. Despite the trade disputes and travel barriers arising from the coronavirus outbreak, China accounts for more than half of global steelmaking production, and that’s just a reality we all have to live with. The country’s industrial production started in earnest in 2003. Steel has a useful life ranging from 25 to 40 years, indicating that China’s scrap reservoir will begin to build in earnest over the next decade. The big debate is whether China will allow that resource to migrate to the global marketplace as it becomes available.
I believe that the government will take steps to keep that scrap at home, somewhat similar to what the Russians currently are doing to their scrap dealers. Either way, China’s EAF-based steelmaking capacity will increase, and as scrap becomes increasingly available at home and at a cost-competitive price compared with offshore-sourced iron ore and coal, it is my opinion that China-based steelmakers will absorb most of that supply.
All of this is good news for scrap suppliers. Despite the current low pricing signaling otherwise, the market need for scrap products will increase with time. The biggest challenges for scrap suppliers to overcome are the residual issue (which can be resolved through more thorough sorting but at a cost) and the perception that using scrap is somehow substandard to the care of the environment. Rebranding the ferrous scrap supply stream as “green” would be a coup for the scrap industry if it can be accomplished. Maybe there’s a way to attach a carbon credit to the use of scrap?
I look forward to the brilliant innovation that the bright minds in the scrap recycling business come up with.
The government of South Korea has announced 100 percent inspection requirements for recovered paper imports, according to PSI. “Recently in Korea, the import of contaminated or improperly separated recyclable paper has become a social problem,” PSI quotes one ISRI contact in the South Korean government as saying. If the material is deemed legal, he says it will be cleared.
ISRI says it has learned the South Korean government notified the World Trade Organization (WTO) of its intent to put all pulp and recovered paper that is “contaminated with oil or contains foreign substances” under the prior- informed-consent procedures of the Basel Convention.
For recyclers, that means South Korea is removing a previous exemption and considering contaminated material hazardous. ISRI says it will seek clarification on thresholds for oil contamination and a definition of “foreign substances.”
In India, the COVID-19 pandemic caused Prime Minister Narendra Modi to institute a three-week national lockdown that started at midnight March 24 and subsequently was extended to May 3.
The lockdown required citizens to stay at home and allowed only “essential” businesses to remain open. Most manufacturing segments outside of health care and food were not deemed essential. “Therefore,” PSI writes, “our recycling customers are closed.”
Seaports in India also had been deemed essential and were open, but many employees were not showing up for work out of fear of spreading the virus, ISRI says, citing Boston-based business information provider Fastmarkets RISI as its source.
Some cargoes have gone unclaimed, “so it is uncertain what will happen when containers that are already en route arrive at port or what storage and demurrage charges might be incurred,” PSI says.
Departments - Newsworthy
Recent news from the various sectors of the recycling industry
APR introduces postconsumer resin certification program
The Association of Plastic Recyclers (APR), Washington, has announced a process to endorse companies that provide third-party certification of postconsumer resin (PCR) and to promote APR member companies that receive certification. To support and grow the use of PCR, APR says it understands it is essential that PCR certification be reliable, consistent and accessible by producers and users of recycled plastic resins.
“The intent of APR’s PCR Certification Program is to actively promote APR member companies that sell certified PCR materials,” says Liz Bedard, director of rigid plastics recycling programs at APR. “This program was developed in response to a growing demand from APR members and stakeholders across the plastics value chain.”
APR’s PCR Certification Program includes three components:
APR endorses qualified third-party firms to conduct certifications. As of March 26, the association lists AMI Environmental Testing, Oceanside, California, and UL Verification Services Inc., Northbrook, Illinois, as endorsed certification companies.
Plastic reclaimers hire the APR-endorsed companies to certify their PCR.
APR members present their PCR certification to APR for nationwide promotion.
California Senate Bill 270 creates standards, including use of recycled content, that reusable bags distributed or sold in California must meet. The APR says any plastic reclaimer’s PCR that has been certified under California’s SB 270 requirements will be considered certified.
APR has outlined the program goals:
provide reclaimers with confidence that the endorsed certification companies adhere to a clear, consistent definition of PCR that aligns with the ISO 14021:2016 definition;
“level the playing field” by endorsing multiple, credible third-party PCR certifying bodies; and
increase manufacturers’ and brand owners’ access to and confidence in PCR supply that meets their needs across diverse applications.
“The APR PCR Certification Program promotes the critical link between the reclaimer actually making PCR and the customer wanting to use PCR,” says Greg Janson, president of QRS Recycling, St. Louis, and co-chair of the APR PCR Certification subcommittee. “The program will undoubtedly enhance the brand equity of PCR in the marketplace, helping to ensure that PCR receives the value it deserves,” he adds.