Ferrous Scrap

Global - Robin Bhar, Metals Analyst for Caylon Credit Agricole CIB
Scandinavia - Bjorn Grufman, M.V. Metallvarden
North America - Cap Grossman, Grossman Iron & Steel

 

METALS INDUSTRY OVERVIEW>>GLOBAL>>Robin Bhar, Metals Analyst for Caylon Credit Agricole CIB

 

Recently, we have had a bit of a roller coaster ride. We started 2010 with a lot of bullish sentiment about the year ahead and then that was derailed by a couple factors. First of all, with China tightening its monetary policy to try to slow its economy, that fanned fears that the only major growth area that we are seeing is going to slow its metal demand and imports of metal, which were very high in 2009.

           

That was followed by the problems in Europe, particularly in Greece, with a lot of concern about the large fiscal deficit that the government is running and whether it would be able to carry on paying its debts. Then obviously concerns about any default would spread like wildfire through Europe to some of the more fragile countries like Spain, Portugal and Ireland.

           

Because of those two concerns, which I think saw the commodity markets and metals really come under pressure, we fell about 20 percent in three or four weeks during late January and early February. As a result of that, the copper price was trading as high as $7,700 per ton and that fell to as low as $6,200 per ton. Since then, we have had a bit of a turnaround.

           

I think a lot of market participants thought this is a short-term concern. Is this enough to really derail the global economic recovery that we are seeing? Are we really going to go back to the recession and the bad conditions of six or 12 months ago? I think most people have concluded that is unlikely.

           

The global economic growth is expanding. That will feed through into demand for more metals. China will not slow drastically; in fact, all the government is doing is fine-tuning growth so that they can just slow it a little bit and prevent inflation from becoming a problem. They still want strong growth so that will continue.

           

The other emerging economies of India, Brazil and other parts of Asia and South America are the regions that are industrializing and developing and driving global demand of metals forward. It’s not so much Europe, the U.S. and Japan now as it is the developing world.  That will continue.

           

If you look at some of the micro details and get away with the fixation over some of these macro concerns with China and Greece, there seemed to be a short-term wobble in the market, which in hindsight presented a good buying opportunity. Copper is now trading back above the $7,000 per ton level, having been as low as $6,200, just 10 days ago. The feeling is that some of the smaller details like looking at some of the data that comes out of the London Metal Exchange (LME) on stock levels and shipment of materials out to warehouses, that’s painting quite a positive picture.

           

More metal is destined to leave LME warehouses in the coming days and weeks. That’s got to be representative of stronger demand. Last week we saw major mining companies like Xstrata, Rio Tinto and BHP painting an optimistic picture, reinstating payment of dividends that they had halted for the last 12 months because of severe pressures on their cash flows. They are reporting that business conditions are improving.

           

Everything is telling me that if we look beyond some of these short-term negatives, the scenario that is being painted three to six months forward from here is that demand will be stronger. Prices are likely to be higher as a result. Some metals like copper, lead, tin, zinc and as demand strengthens, people will be talking about supply constraints, with not enough investment on the mining side having taken place in the past five years to meet this increase in demand.

           

With the credit crunch, you are also seeing delays with new project commissioning. Feasibility studies have been delayed or postponed and so the supply response to stronger demand will be delayed. Just as much as we have had a slump in demand because of the credit rationing, on the supply side as well, we have had this supply rationing and delays and postponements of new projects so that when demand does get back on track, as it appears to be doing, we may not have an adequate supply pipeline to meet that demand.

 

I think that’s where we are at the moment. Where we are today, compared with a couple months ago, there does appear to be more positive sentiment. If you look forward and can get past some of these short-term concerns I think business conditions will have improved even more. I think this is the reason why we are seeing the recovery in metal prices that we have seen in mid-February.

           

Overall, sentiment does seem to be more positive. When you look at some of the supply, demand factors, it just paints a better picture overall. Yes, there are concerns about the growth in Europe, but I don’t think we were that optimistic in the first place about European growth, simply because of the big deficits that governments are running up. That was always going to be a hindrance to growth moving forward.

           

In China, our view is that the economy is growing so fast that really it makes sense for their government to tighten credit. Really they don’t want to bring their economy to a halt, as that would be disastrous. Instead of the economy growing at 10%, they want it growing at 8% or 9% so that it doesn’t create inflation, but creates jobs. They are fine-tuning and using interest rates and bank-reserve ratios to do that. But they are mindful that all they want to do is to slow the economy gently and not bring it to a shuddering halt.

           

So for me, a lot of governments in the West would love growth of 8 percent. In the U.K. we have growth of close to zero. And that applies to most of Europe. In the U.S. you are doing better at 4.5% to 5% on an annualized basis. A lot of governments would kill for a growth of 8 percent.

           

In a way, it’s a nice problem to have. The fact that they are having to raise reserve requirements, that the banks are having to tighten policy to slow growth. In the U.K., there is no hope of any interest rate rises, which to me suggests that growth is going to be flat for several more months to come.

           

We are running huge deficits. We have a lot of problems in the U.K., so the last thing that the bank of England will be able to do is to be able to raise rates.  That’s negative for us.  I’m sure the U.K. government would love to have growth of 8% and not flat.

           

It is true that too strong of a growth is a problem, but so is no growth at all. There is going to be some kind of happy medium between the two. But to me, China growing at the speed that it is growing is very bullish for the raw materials markets.

 

Robin Bhar can be contacted at robin.bhar@uk.caylon.com

 

 

 

FERROUS, NONFERROUS SCRAP>>SCANDINAVIA>>Bjorn Grufman, M.V. Metallvarden

 

Since last month, the pace has changed in the ferrous market. It is picking up. The largest Swedish steel producer, SSAB, just one week ago announced that they are going back to full production at the beginning of March. Their order books are now filled, so they feel comfortable doing that. That’s good news for us in the scrap industry. Other steel producers in this region are also coming back on stream. Based on their appetite for scrap, that is extremely exciting, because most dealers have a lot of scrap in our yards.

           

The winter in this region has been very hard. We have had a lot of snow, so that brings the availability down and makes the prices increase. There is very little material coming out of Russia, which is normally one of the major suppliers for this area. As a result, I think we will have a shortage in the second quarter of this year and probably some price increases.

           

Steel prices still are not moving in the right direction. They have not increased substantially, but I am sure they will once the demand comes back.

           

I think the weather conditions are very, very bad and scrap dealers have difficulty moving their materials. The northern ports that supply us are frozen. It is only possible to get material with ice-breaking vessels. We don’t have too many and if you use an ice-breaking vessel, the freight costs will be very, very high and you will have problems justifying the economics for that shipment.

           

On the nonferrous side, not much has changed. Prices are extraordinarily high in spite of the fact that we aren’t consuming very much. We can see that the LME stocks are finally starting to go down again, but from a very, very high level. It is surprising that prices are so high with the enormous stocks we have in most of the metals.

           

The consuming works are not running fully yet. The car industry is still producing on a very low level and the consumption of metals in this region is still extremely low in comparison to what it normally is. It’s better than what it was six months ago, but it’s still not in the neighborhood of what it should be under normal circumstances.

           

The Dutch car company Saab seems to be headed in the right direction. I think that they have a business model that will be very interesting to people. Keep in mind that the car industry is very challenging and the capacity in the car industry is very high and somebody ought to disappear. But I think that Saab now has a new ownership structure that will keep them in business for another couple years at least.

           

Also, Volvo is being bought by a private group in China. They are financed by the state-owned banks. Volvo seems to have a business plan where they are going to keep the research and development department in Sweden. Most of the present production will stay in Sweden, the Netherlands and Belgium. Volvo is also going to start up a new factory in China that will produce some 300,000 cars per year. It is a fairly big factory. Volvo will have yearly production from 350,000 to 400,000 cars per year up to 750,000 cars per year.

           

I think that both the Swedish car producers are now looking toward brighter futures than they had just six months ago. That will also bring the consumption of nonferrous metals back to market.

           

The recycling of lead and lead acid batteries collection in Europe has gone down dramatically due to this change in the business temperature and the lack of new cars. There is a very big lack of scrap and scrap batteries going into the secondary lead plants at the moment.

           

We have one secondary plant here in Sweden that normally produces 50,000 tons per year but they are now forecasting annual production of 35,000 tons. They are missing roughly 30 percent of their supply due to the lack of scrap batteries.

           

It is hitting the industry in different ways, but there is a crisis in our economy.

           

I think what is missing right now is people’s confidence. People don’t dare to buy a new house or dare to buy a new car because they don’t know if they will have a job next week. As soon as consumer confidence comes back, which I am hoping it returns in the first half of this year, I think that the economy will return as well.

           

We are on the right track, even if we are just at the beginning of it.  

 

Bjorn Grufman can be contacted at bjorn.grufman@metallvarden.se.

 

 

 

FERROUS SCRAP>> NORTH AMERICA>> Cap Grossman, Grossman Iron & Steel

 

The situation with scrap intake depends on which snowstorm you were last in. For a lot of regions, weather has made business tough. In our Midwestern area the weather has not been as severe as in other regions around the country. As a result, scrap may have flowed a little bit better, but not by much.

           

Demand at the steel mill level seems to be increasing for most grades. Specifically, order books for the steel mills producing flat rolled products appear to be good. And with increasing demand comes increasing capacity utilization, requiring more scrap units.  In the face of this escalating need, however, we continue to find ourselves in a market defined by a lack of supply of those units.

           

A lot of mills in this area and other areas have increasing demand, so they are increasing capacity utilization, and that’s good. However, we are still looking at a supply imbalance. We find ourselves in the midst of a market that is being influenced by a lack of supply in the face of demand that is expanding quickly. There just is not enough scrap to fill that demand, and I don’t know where it’s all going to come from at this point in time.

           

Gradually the imbalance will tend to ease somewhat. New steel is going somewhere to be made into new products for consumption.  Whatever end markets that involves will generate higher volumes of scrap causing overall  scrap supplies to increase.  Warmer weather and higher prices should increase the flow of obsolete scrap as well.  These scenarios should mitigate against skyrocketing scrap prices I would think. But, don’t forget, we don’t have any significant export of ferrous scrap right now. If that activity were to increase it would throw another factor into the supply/demand evaluation. In general, the flow of scrap, in the short term, looks to improve and we can expect better balance in the marketplace.

           

Unfortunately, I think today’s frenzy for raw material will impact margins negatively.  While volumes will increase, spreads between buying and selling prices will probably shrink.  Discipline will hopefully return to the market place as balance between demand and supply returns.

 

Cap Grossman can be contacted at cap@grossmaniron.com.