When several of China’s government agencies banded together to create Operation Green Fence, environmental protection was touted as the key goal behind the heightened scrutiny of secondary commodity shipments into China.
Subsequent statements from customs and inspections officials have made it clear that Green Fence also has a “follow the money” aspect. While keeping out low-quality and especially contaminated shipments is one desired result, so is ensuring that scrap buyers are properly representing the full taxable value of the containers of material they import.
Scrap metal, paper and plastic exporters in North America and scrap buyers in China agree that the inspectors enforcing Green Fence have taken their task seriously, if not always consistently, from port to port.
Transactions have been delayed, renegotiated and in some cases cancelled throughout the year because of the increased scrutiny brought about by Operation Green Fence. In the plastic scrap sector in particular, some North American exporters have had difficulty accessing the Chinese market. As well, manufacturers in China who rely on imported plastic scrap feedstock are struggling to make it through 2013.
Although some initial statements from Chinese government employees referred to Green Fence as being phased out in late 2013, the operation’s timeline may well be extended if customs officials are convinced it is yielding additional tax revenue.
For North America’s recyclers, if Green Fence extends into 2014, it could mean shipping to China will remain a less-favored option, especially if they have experienced uncertainty and unpredictability when sending similar loads to different ports or even to the same port in different months.
In the abstract, many recyclers describe their operations as manufacturing processes and they strive for the highest levels of product quality and uniformity. Many scrap consumers have long held recyclers to these same high standards, so there is nothing novel about meeting tight specifications.
From this point of view, perhaps Green Fence can be seen as a long-term positive—the closing of a loophole that allowed some industry practitioners to get away with giving less than their best effort while making minimal investments in quality.
As the year of the Green Fence, 2013 will yield bad memories for recyclers on all bands of the quality spectrum. It remains to be seen whether recyclers who have responded earnestly with investments to upgrade quality will be rewarded with a smoother path in 2014.
Pacific Steel & Recycling at a Glance
Executive Team: (Pictured above from left) President and CEO Jeff Millhollin, Vice President of Steel Operations Ed Leppien, Incoming Vice President of Steel Operations Ed Joyce, Vice President of Scrap Operations Patrick Kons, Vice President of Business Development Stuart Boylan, Vice President of Ferrous Processing and Trading Ken Halko, (not pictured) CFO Tim Culliton, CIO Dave Richards and Human Resources Manager Jayne Merrill
Locations: Headquartered in Great Falls, Mont., with 46 branch locations in the U.S. states of Colorado, Idaho, Montana, Nevada, North Dakota, South Dakota, Utah, Washington and Wyoming and in the Canadian province of Alberta
No. of Employees/Owners: 820
Equipment: Two 80/104 3,000-horsepower shredders from Metso Texas Shredder with downstream separation systems from Steinert, four Lindemann 1025 stationary shears from Metso, 36 mobile shears mounted on excavators, 120 tractor/trailers and 16 mobile 580 model balers from Al-jon
Services: Ferrous and nonferrous scrap processing, deconstruction, transloading at the inland Port of Tacoma in Washington for its own materials, new steel sales and first- and second-stage processing
Pacific Steel & Recycling, headquartered in Great Falls, Mont., has kept a relatively low profile over the years, quietly expanding its presence in the Mountain West region. The company, which was founded in the 1870s by German emigrant Joe Thiebes and was incorporated in Washington state in 1918 as Pacific Hide and Fur Depot, currently operates 46 branch offices in nine U.S. states and Canada. The company’s recycling division processes some 500,000 tons of ferrous and nonferrous scrap per year in addition to catalytic convertors and electronics. Pacific’s steel division also sells from 60,000 tons to 65,000 tons of new steel annually.
The company’s management team credits its success to its employee-ownership as well as to its diversified operations.
Benefits of Diversity
“We are unique in that we have a new steel division and a recycling division,” says Patrick Kons, vice president of Pacific Steel & Recycling’s recycling operations. “We work closely with the mills in that we are selling scrap or bringing scrap into those domestic mills on the back end, and we’re buying new steel products and selling for retail. It is good vertical integration with that business model and aligns us with domestic producers of new steel products.”
Ed Joyce, the incoming vice president of the company’s steel operations, adds, “Diversification is a good word to use as far as our business. It has helped us weather this tough economic environment being both in scrap and in steel.”
Joyce will replace Ed Leppien, who is retiring from the company at the end of the year.
Pacific Steel & Recycling’s steel division seeks to add value for its customers, Joyce says, as many of the products steel distribution centers sell have been commoditized. A large percentage of the tonnage leaving the company’s Coeur d’Alene, Idaho, facility involved some degree of first- or second-stage processing. Pacific recently acquired this facility, which has one of the largest press brakes in the western U.S. with a capacity of 1,500 tons, Joyce says.
Pacific Steel & Recycling President and CEO Jeff Millhollin adds that the company’s Coeur d’Alene plant also operates several plasma tables, a water jet and a laser multitool. He says the facility is largely geared toward plate processing and serves clients not only in the Northwest but also throughout North America.
“Our customers are under as much economic and regulatory pressure as we are in this business,” Millhollin adds. “If we can work to help them have less manpower out there or less equipment, then they are saving money.”
In addition to its two business segments, Pacific has diversified its recycling operations by adding catalytic convertor processing nearly four years ago and electronics recycling last year, Kons says. Its branch locations collect catalytic convertors, which are transported to a single location for processing. Electronics also are collected at the company’s branches and processed at a single location, which is certified to the R2 (Responsible Recycling Practices) standard.
“We went for R2 certification at the onset,” Kons says of the company’s electronics recycling facility in Nampa, Idaho. “We said, ‘We are going to do this thing right,’ and we put a lot of energy into it with our environmental compliance specialist and our branch managers.”
While Millhollin and Kons characterize the company’s electronics recycling business as off to a gradual start, Millhollin adds, “We are happy to have launched that business. We see that as a growing recycling stream in the future and there was a need in our footprint for that service.”
Pacific Steel & Recycling disassembles electronics by hand and operates a shredder on site for hard drives. Metal housings and other components from the devices are transported to Pacific’s auto shredder near Boise, Idaho, for shredding.
Matters of Geography
Transporting material long distances in the sparsely populated Mountain West can be considered a drawback of Pacific’s operating region, but the company’s management team also sees many benefits associated with its geographic coverage.
Pacific Steel & Recycling, headquartered in Great Falls, Mont., is an employee-owned company. President and CEO Jeff Millhollin says the average tenure for the company’s employee-owners is 18 years, while turnover at the company is in the 3 or 4 percent range. Millhollin credits these statistics to Pacific’s pre-employment screening process and the culture that is unique to employee-owned companies.
The company administers personality and integrity tests to job candidates and prioritizes ongoing training for employees, Vice President of Business Development Stuart Boylan says. Pacific also promotes from within. Millhollin started as a ferrous salesman, while Boylan began his career with the company pulling orders for its new steel division.
Millhollin says Pacific has a well-thought-out and sophisticated employee development program, including an in-house Web training system geared toward employee-owners in the management track that is similar to a capstone MBA program. Pacific also offers Web-based sales training and safety training that includes a review of Department of Transportation regulations. In fact, before employees begin work in the company’s branches, each one undergoes two full days of safety related training.
Pacific’s employee-owners are actively engaged in their communities, Boylan says, volunteering for various charities and fundraising events. The company requires each branch to give a certain dollar amount based on a formula related to the location’s profitability, Millhollin adds.
The charities a branch supports are at the discretion of the branch manager with the input of the location’s employee-owners. Pacific also has a corporate community contributions committee that helps to vet the various requests for help the company receives.
One such benefit is related to the growth in the energy and mining industries in the region. “When you have a stagnant economy, it is hard to move tons of new steel,” says Millhollin. “We are fortunate in our region that we have a lot of oil and gas activity and [mining] extraction activity.” He adds that activity in these sectors has benefitted Pacific’s new steel division as well as its recycling division. It’s also changed the company’s customer mix.
“Peddler traffic has been the mainstay of the business for many years,” Kons says. “All of the branches are set up for peddler traffic and they do a fair amount of that business.”
However, with the growth of the mining, oil and gas industries, Pacific has seen its industrial business grow, he adds.
Despite this regional activity, the business climate in the scrap recycling industry remains challenging. Kons says markets have contracted, compressing margins throughout the industry. “I would say it’s a combination of less available scrap and more competition,” he adds. “With prices dropping off, not as much scrap is being generated.”
Scrap industry competition has fueled some investments in Pacific’s recycling operations. The company is finalizing the installation of its second shredder, an 80/104 from Metso Texas Shredder, San Antonio, in Lockwood, Mont., near Billings. The installation also will include an upgraded downstream sorting system from Steinert, Walton, Ky., designed to improve the company’s recovery of nonferrous metals. Pacific Steel & Recycling also operates a shredder of the same make and model in Mayfield, Idaho, near Boise.
While markets were fairly strong in 2011 when Pacific decided to open a branch in Lockwood and install the shredder, the market has softened since. Kons says, “We will be challenged.”
The challenges relate in part to the sparsely populated region in which Pacific operates. (For instance, the population of Montana only recently passed the 1 million mark.) Kons says larger population centers in the Mountain West region can be 300 to 400 miles apart. “We have to reach a long way to get tonnage,” he says.
The company has recently invested in four Metso Lindemann LUC 1025 stationary shears for its operations; it used only smaller stationary and mobile shears in the past. The stationary shears, Kons says, “are all about efficiency and man hours per ton.”
In a region with dispersed population centers, transportation costs also have a considerable affect on the company’s profitability. Pacific Steel & Recycling has tried to address this issue through strategically locating its operations on railroad lines as well as by establishing a transloading facility on the Port of Tacoma in Washington.
Pacific’s operations are primarily served by one of two rail lines: the Union Pacific (UP) and the Burlington Northern Santa Fe (BNSF) and Montana Rail Link (MRL).
“We’ve placed the shears and the shredders in geographic and railroad locations so that we have the ability to ship internal tons between processing facilities based on markets and railroad rates,” Millhollin says. “We have two shears and a shredder on the UP and two shears and a shredder on the BNSF/MRL.”
Pacific opened its transloading facility roughly three years ago. Gondolas of scrap are shipped via rail to the facility, where the material is then loaded into containers for shipment overseas. Much of the material shipped from this location is zurik and zorba, however, Millhollin says quite a few ferrous tons also head overseas from this facility. In the last year, he estimates that 45,000 tons have been shipped through the transloading facility.
Perks of Ownership
While the current business environment presents many challenges to Pacific Steel & Recycling as well as to scrap recyclers and steel distributors in general, the company’s management team says its ownership structure offers a distinct advantage over its competition.
According to Pacific Steel & Recycling, the Thiebes family believed in sharing company profits with key employees, awarding them company stock beginning in the late 1930s. This program led to a profit-sharing program through which employees could purchase company stock. When the Thiebes family was ready to exit the business in the 1980s, the family allowed employees of Pacific Steel & Recycling to purchase the company through an employee stock ownership plan (ESOP). The purchase was finalized in the 1990s.
Pacific Steel & Recycling Vice President of Business Development Stuart Boylan says the culture that is created through employee ownership has contributed to the success of the company. “There is sense of empowerment and enthusiasm for the industry and the company,” he says. “The employees benefit directly as the company succeeds. This provides strong motivation for improved customer service and maintenance—they want to put their best foot forward as owners.”
While Boylan says employee-owners begin receiving shares in the company the day they start, Pacific uses a vesting schedule for its ESOP that the federal government established, with employee-owners becoming fully vested in their sixth year with the company.
Boylan says because Pacific Steel & Recycling has a lot to offer its employee-owners, the company’s turnover rate is low and its screening process is rigorous.
Because seniority leads to higher stock accumulation, roughly 75 of Pacific’s employees own 50 percent of the company, he says. However, Boylan adds, “All of our employee-owners are engaged and thinking about things to make us better all the time.”
This mentality extends to determining how to best navigate the company in the current economic and regulatory climate.
“We are very cost conscious,” Millhollin says of Pacific Steel & Recycling. “We are looking at reduction in overtime hours—manpower is your No. 1 cost. We are looking at efficiencies and have invested where we think we will get a bang for our buck on cap-ex material and equipment.”
He continues, “The bottom line is that we are trying to take care of business the best we can because costs are going up and prices are going down. It is a difficult scenario, and everyone is under pressure to drive profitability.”
Pacific Steel & Recycling, headquartered in Great Falls, Mont., is an employee-owned company that says it strives “to be the business of choice by providing high-quality services and products that meet our customers’ needs.”
According to Pacific Steel & Recycling, the following values help the company achieve its mission:
1. Pacific Steel & Recycling values honesty and integrity, keeping commitments to employees, customers and stakeholders.
2. Pacific Steel & Recycling values strength and stability created by quality employees, sound financial management, an entrepreneurial mindset and operational flexibility.
3. Pacific Steel & Recycling values continuous improvement in employees, products, services and operations.
4. Pacific is committed to serving its customers (external and internal) to consistently meet or exceed their expectations.
5. Pacific is committed to meeting or exceeding regulatory requirements to entrust a legacy of safe work practices and environmental stewardship that contributes to sustainability for our families and the communities that it serves.
The author is managing editor of Recycling Today and can be contacted via email at email@example.com.
Ferrous scrap recyclers have several unpleasant near-term memories they can draw upon to recall when conditions were worse than they have been in the summer and fall of 2013.
However, unlike the frog who sits comfortably in warm water as it is slowly brought to a deadly boil, many of them have been sensing that the market has steadily become less enjoyable throughout 2013.
Statistics for pricing and export volumes and those in the ledgers of publicly traded companies show that the first nine months of 2013 can hardly be described as prosperous, and few forecasters are predicting a final quarter boost to close out the year.
Waiting for a Spark
Metals recyclers who gathered in mid-September for the 2013 Commodities Roundtable Forum, hosted by the Institute of Scrap Recycling Industries Inc. (ISRI) in Chicago, heard from speakers who do not foresee a steel industry or ferrous scrap price surge in the near-term future.
Mike Marley, an analyst with MetalPrices.com, Basalt, Colo., described the ferrous market as quiet, adding that fewer deals were being made domestically and in the export market in September, with most of those being for small tonnages. “There is no panic selling,” Marley commented. “In September, prices were down $10, and shredded prices were down $15 or down $20 in some regions.”
Marley said there appeared to be an overall bearish sense in the market, with shredded scrap continuing to show weakness. “It was almost a given that shredded would fall,” said Marley, adding that bundles and busheling also fell in September.
Lead times for orders at steel mills globally were not stretching out as far as they had been, Marley added, which suggests steel sheet supply was catching up with demand. As well, some steel mill capacity was down for maintenance. This might help firm up steel prices, Marley speculated, but would reduce scrap demand. Further out, Marley said more shutdowns of steel capacity over the next few months would balance out against the mills coming back online.
With the general bearishness in the ferrous market, “No one is looking for a rebound in prime scrap [pricing],” Marley remarked. “Lots of guys sold what they had this month. They want to see just dirt by the end of the month.”
Going forward, Marley predicted a “soft, sideways market. From a seller’s perspective, it means zero to down a bit. For a buyer, it means that you will [ask for] a $10 cut, maybe more.”
Jarek Mlodziejewski, a scrap analyst with The Steel Index, with U.S. offices in Pittsburgh, also referred to the downward trend in ferrous scrap pricing and focused on the export angle. “Markets have been [oversupplied] over the past several months,” he said. While Turkey bought somewhat steadily in August, purchasers from that nation “recently dropped out of the market,” Mlodziejewski said. Overall, he said exports from the U.S. to Turkey had decreased by approximately 20 percent year to date.
Mlodziejewski also told attendees that Turkey was striving to become more self-sufficient in scrap, eventually causing Turkish steel mills to reduce their intake of scrap from outside of the country.
Meanwhile, buyers from India are largely unable to place additional orders, with a key reason being the weakness in the Indian rupee. Ferrous scrap exports from the U.S. to India are down around 50 percent, Mlodziejewski pointed out. Additionally, some Indian firms were purchasing more ferrous scrap from the Middle East and Africa, he added, at prices far cheaper than from the United States.
John Harris, who has retired as one of ArcelorMittal’s top scrap purchasing managers, touched on the perceived overcapacity of shredders and the move toward smaller and even portable shredders. “That will change the dynamic,” predicted Harris. “The [super-sized] shredders that were only operating part time in many cases now could be a thing of the wayside, sold to China.”
Competing for Less
Throughout 2013, the predominant business condition causing challenges in the ferrous sector has been a lack of scrap generation. Scrap processors point to a lack of construction and demolition activity as one factor as well as the brutal competition among shredder operators for auto bodies, appliances and loose sheet.
The struggle for feedstock to keep equipment fed is reflected in the results of publicly traded scrap companies such as Sims Metal Management, New York.
A presentation accompanying results for the firm’s 2013 fiscal year, which ended June 30, 2013, reports a 20 percent decline in global sales volumes compared with fiscal year 2012.
In North America, Sims Metal Management’s volume (ferrous and nonferrous combined) in its 2013 fiscal year was down by more than 1.7 million tons, or more than 15 percent, compared with the year before. The company points to a drop in brokered export tons off the Pacific Coast as one of the factors.
Sims Metal Management sounds an optimistic note in terms of the potential for scrap generation and shredder feedstock in North America to increase in the second half of 2013, citing the following factors:
- Light vehicle sales in the U.S. in 2013 are expected to increase by 6 percent compared with 2012;
- U.S. household appliance manufacturers forecast their shipments to be up 7 percent in 2013 compared with 2012; and
- Consumer confidence in the U.S. is up 13 percent compared with 2012.
In terms of its North American ferrous export tonnage, Sims Metal Management indicates conditions could be improving in the second half of the year. “East Coast export ferrous scrap markets improved through July and August, with West Coast export markets initially lagging but show[ing] increasing demand in August,” the company states in its presentation for investors.
Schnitzer Steel Industries Inc., headquartered in Portland, Ore., points to sagging export demand as a reason why its sales figures will be down for the quarter that concluded at the end of August 2013.
“Export demand for recycled metals weakened versus the third quarter as reflected by lower shipped volumes and lower average sales prices,” the company says, giving guidance for its fourth quarter, which ended Aug. 31.
“Ferrous [scrap] sales volumes are anticipated to be 5 to 10 percent lower than the third quarter, and average ferrous selling prices are expected to decline from 8 to 10 percent sequentially,” Schnitzer Steel Industries says.
One Mission Accomplished
Finding enough ferrous scrap and then processing it and selling it with a profit margin have been daily challenges for scrap processors throughout 2013.
One bit of good news for scrap recyclers is that Americans have become increasingly efficient at making sure that anything obsolete made out of metal is recycled rather than thrown out.
The Steel Recycling Institute (SRI), a business unit of the American Iron and Steel Institute (AISI), Washington, D.C., says since the formation of SRI 25 years ago more than 1 billion tons of steel have been melted by steelmakers in North America.
SRI was commissioned by the North American steel industry in 1988 to develop an infrastructure for the recycling of steel cans and to serve as a primary information and technical resource. By 1993, SRI’s focus expanded beyond steel cans to promote the recycling of all steel products.
“For a quarter century, SRI has been the local face of the steel industry, providing advocacy, information and assistance in facilitating increases in the recycling of major steel products, including cans, cars, appliances and construction materials,” says Gregory Crawford, SRI executive director.
SRI says in 2012 the overall recycling rate for steel in the U.S. was 88 percent, with nearly 84 million tons of steel recycled. This included the more than 1.3 million tons of tin plate steel, which were recycled at a rate of 72 percent, the highest among packaging materials, according to SRI. More than 16.3 million tons of automotive scrap were recycled at a rate of 92.5 percent in 2012.
Other rates, including appliances and construction products, are based on industry estimates of retail and scrap collections, including more than 2.7 million tons of appliance steel recycled in 2012 at an estimated 90 percent. Also, each year, based on construction and demolition industry estimates, about 98 percent of out-of-service construction plates and beams are recycled, and 70 percent of rebar and other structural steel are captured for recycling through demolition and disassembly.
The commitment to collect and recycle steel has been inherent to steelmaking for nearly as long as steel has been made in North America, says Thomas Gibson, president and CEO of AISI. “For 25 years, steel’s recycling successes have been spearheaded by the SRI,” he comments.
Even as prices have stagnated and then slumped in the previous 18 months, ferrous scrap recyclers were initially concerned about a lack of scrap and not a decline in demand.
As 2013 has taken shape, however, the tepid demand from export brokers and some domestic steel mills has created problems on the sell side.
Figures collected by the American Iron & Steel Association (AISI), Washington, D.C., show that year-to-date steel production in the U.S. stood at 70.3 million tons through Sept. 21, 2013. That figure represents a 3.6 percent decrease compared with the 72.9 million tons produced during the same period in 2012.
The decline in U.S. steelmaking has been joined by a considerable drop in demand from some key players in the export market. According to the U.S. Geological Survey (USGS), in the first half of 2013, the U.S. shipped 9.9 million metric tons of scrap overseas, down more than 12 percent from the 11.3 million tons shipped in the first half of 2012.
Buyers in each of the four nations that were the largest international buyers of ferrous scrap from the U.S. in the first half of 2012 have purchased less scrap from the U.S. in the first half of 2013:
- Turkey purchased 580,000 fewer tons (-17.5 percent).
- Taiwan purchased 180,000 fewer tons (-10.2 percent).
- South Korea purchased 640,000 fewer tons (-37.4 percent).
- China purchased 173,000 fewer tons (-15 percent).
These declines do not mirror identical drops in steel production in these four nations. According to the World Steel Association, Brussels, steel output in both China and Taiwan has actually increased during the first eight months of 2013 compared with 2012.
Although steel production is down by 5.4 percent in Turkey and by 6.3 percent in South Korea, those figures do not match their more dramatic drops in U.S. scrap purchases.
As mentioned by Mlodziejewski at the ISRI Commodities Roundtable, scrap buyers in these nations are seeking more tonnage within their own borders or in other nations that may offer better currency exchange options.
As 2013 nears its end, it appears that, for ferrous scrap recyclers, the year will go into the books as one where the competition for available scrap was tough, prices drifted downward and eventually even the sell side of the business presented its challenges.
The author is editor of Recycling Today and can be contacted at firstname.lastname@example.org.
Alvin Toffler gave us the term “information overload,” and back in 1970 he wrote a book with this title, defining the term as a perception of “too much change in too short a period of time.”
The steel industry has been through enormous changes in the last 20 years; it has literally been turned upside down. Total crude steel output more than doubled between 1992 and 2012. In the same period, that production swung from 36 percent Asian based to 64 percent. The growing use of electric arc furnace (EAF) technology (which uses ferrous and other metallic scrap) was reversed as new capacity using blast furnace (basic oxygen furnace, or BOF) technology (which primarily uses iron ore and coking coal) largely was installed. Ever-decreasing finished steel prices shook off their torpor and began to fluctuate wildly.
As if these changes were not enough, the IT revolution and three major recessions (the Asian financial crisis, tech-bubble burst and 9/11 and the global financial crisis) also bubbled around in the background. No one can say the steel industry has not successfully navigated challenges.
That said, the western steel industry has largely avoided meaningfully tackling a potential sea-change: The introduction of financial tools designed to manage price risk and uncertainty. Given the enormous uncertainties in the macro and micro environments and the positive implications of the new tools, this is hugely surprising.
Could it simply be that there has been too much change in too short of a time to consider yet more change? The level of “futures” knowledge at conferences has mushroomed over the last few years, so perhaps with various successive crises breaking upon the industry, the default position has simply become “continue to monitor” or “wait and see.”
Adoption rates have varied significantly between contracts: Many now think that we are at a stage where the contracts that have shown staying power to date will simply see additional companies registering to trade and existing users expanding the volumes they trade. Others expect liquidity from more liquid ferrous contracts to “spill-over” into hitherto less liquid ones. Either way, it does not seem as though ferrous derivatives are going to go away.
Why? Because they are useful to businesses. To be clear, steel industry companies using these contracts are not using them to speculate; among other things, they use them to:
1. Manage price risk for forward commitments (i.e., a buyer may lock in prices of steel for a number of months ahead);
2. Manage the price risk of inventory, as stock of anything rapidly shifts from an asset to a liability in the event of adverse price movements;
3. Book “paper profit” immediately (An example would be a buyer having a physical position of scrap purchased at $400 per long ton and seeing a forward contract being available at $450 for next month. Rather than waiting to see if that is achievable in 30 days, the buyer can lock in that $50 per long ton profit immediately using swaps.); and
4. Derisk their overall business from unknown unknowns (e.g., Turkish mills that are registered to trade scrap swaps have a way to lock in prices when “big events,” such as a huge East Coast storm, happen.
All of the ferrous industry contracts that are around are relatively young, so it is worth recapping them all. Before examining the contracts, it is worthwhile noting a few things. First, there are two main ways of constructing a contract:
1. Physical delivery – Forward contracts can be settled either by cash or by physical delivery, either from the stocks of the exchange or by delivering physical material to the exchange.
2. Cash settlement – Contracts are solely settled by money. The underlying commodity never trades hands. Companies are looking to remove price risk from the commodity in question rather than source or deliver the commodity. Companies are locking in a price, and cash is paid out to “deliver” that price.
Second, exchanges have been offering price-risk-management tools across the ferrous value chain, namely in steelmaking raw materials, semifinished goods and finished goods themselves. This means quite a variety of contracts are out there.
Third, as there have been a number of launches, sometimes covering the same commodity, it is inevitable that there have been losers as well as winners.
Only “extant” contracts, i.e., those that have or are seeing trading against them, will be discussed. Those at the dormant stage of new product development will be left aside.
Hot-Rolled Coil. The CME group launched its cash-settled U.S. Midwest hot-rolled coil contract as the global financial crisis broke—just as financial liquidity dried up and firms began looking not to the future but to basic survival. Unsurprisingly, in the fourth quarter of 2008, it saw an unimpressive grand total of 23 lots traded.
From this inauspicious start, it has, however, grown at a fairly steady rate year on year. From 460 short tons being traded in year one, it saw 877,340 short tons being traded during 2012. Nevertheless, the physical market is roughly 40 million short tons, so this represents around 2 percent of total output being hedged.
LCH.Clearnet (the London Clearing House) launched a cash-settled European hot-rolled coil contract in the less terrifying (though deeply depressed environment) of 2011. Again, it had a quiet first year, seeing 200 lots traded. By 2012, that had increased to 3,900 lots. In context, this is less than 0.2 percent of physical volumes.
Billet. The London Metal Exchange (LME) launched two physically deliverable steel billet contracts (Mediterranean and Far East) in February 2008, having an advantage of launching into a prefinancial crisis era, when steel billet prices were soaring. By August of the following year, more than $1 billion worth of billet had been traded. The Far Eastern contract, which saw volumes shrink by 84 percent between 2008 and 2009, had underlying issues. Nevertheless, the Mediterranean contract grew 132 percent over the same period. However, again, the contract had structural issues, as warehousing was not available into Turkey, a key billet producer in that region. By July 2010, the two contracts were merged into one “global” reference point as open interest shrank on the Far East contract.
However, physical delivery issues were largely cited as the cause of problems for the LME contract throughout 2012, culminating in some high-profile companies such as Deutsche Bank publicly “abandoning” the contract. Volumes have retreated markedly since.
Black Sea Billet. The CME Group launched a cash-settled (Black Sea focused) billet contract in 2011. As the LME contract stumbled, there was a flurry of interest and trading in this contract. In 2012, 1,065 lots were traded, though levels in the first three quarters of 2013 were subdued.
Coking Coal. Perhaps the most enigmatic of all launches, the cash-settled CME Group’s coking coal contract, has not taken off in a significant way. Trades continue to be registered, yet volumes remain some way below the debut year.
Iron Ore. Iron ore is the stand-out success in the world of freely tradable derivatives. Each month sees around $2.5 billion worth of financial contracts traded. At least seven exchanges and clearing houses around the world offer clearing services for iron ore.
The underlying market for iron ore fines is enormous, single-handedly moving global bulk freight rate prices by virtue of its size. Nevertheless, derivatives volumes are growing so fast they are already an appreciable proportion of that physical market (over a quarter of it by the end of the third quarter).
However, while iron ore derivatives are well on track to hit “1x physical” in 2014, most futures markets trade a multiple of times the physical market. This is because, in the example of aluminum markets, the bauxite producer hedges risk via aluminum contracts, the alumina producer hedges risk against the same, as does the aluminum producer. Stockists and end buyers do as well. The same aluminum contract changes hands as each leg of the supply chain off-loads price risk. As a result, more than 20 times the physical market of aluminum tons are traded financially.
While iron ore derivatives are showing quick growth, nevertheless, at only one-third to half of the physical market this year, a lot of growth clearly is left.
Scrap. Finally, to scrap! If iron ore’s “home” is naturally in Asia, North America is the home of ferrous scrap: The U.S. is by far the world’s single largest origin of imported scrap alongside its significant domestic market consumption.
For EAF mills, scrap forms a higher proportion of input costs than iron ore does for BOF mills. Therefore, on the basis of the U.S. being the world’s largest single group of collectors, consumers and exporters, scrap derivative contracts should be expected to see quick adoption by a large proportion of the market.
Adoption has not been spectacularly quick, however. Since 2011, the U.S. Midwest busheling contract and the Turkish 80:20 import scrap market have seen a total of 167,120 tons traded between them. In context, that is only slightly more than four Handymax vessels worth of export material, or around a monthly buy for a mill’s strategic head of purchasing.
The busheling contract is focused on prime scrap, whereas the Turkish import market is focused on obsolete material. Between them, they address the needs of Midwestern industrial scrap buyers and sellers as well as East Coast obsolete collectors, processors, exporters and mill buyers.
Industry Leaders & Crowd Composition
Readers of Recycling Today magazine are unlikely to have as much of a visceral interest in coking coal swaps as they might in the scrap contracts. The big question is: Why did the iron ore contract take off so spectacularly and why have the scrap contracts not followed suit?
With iron ore, a large number of banks were involved in the early days, trading on their own books or on behalf of clients. Physical traders looking to convert floating prices into fixed prices (i.e., to “book” profits) found that brokers easily matched their trades with companies that wanted to convert fixed prices to floating. Why did companies want to do that? They saw upside in prices—particularly those that had annual supply contracts at far lower levels than the spot market. Ultimately, a variety of firms—sellers, traders and buyers, the whole supply chain—registered to trade.
As, some physical industry leaders really embraced iron ore derivatives as being fundamentally useful for hedging risk.
Looking at the companies registered to trade the 80:20 contract, they are almost exclusively traders. This is hampering the ability to book trades, as each party largely wants to make the same trade. A similar situation seems to exist in busheling. Furthermore, no physical scrap market leader (seller or buyer) is currently standing up and actively looking to implement hedging into its business.
On the positive side, any mill, processor or exporter registering to trade ferrous scrap swaps is likely to find a “wall of liquidity” waiting. This would be hugely beneficial for those looking to hedge, allowing trades to be booked quickly.
On the negative side, brokers say they are not overwhelmed by clients opening accounts to trade ferrous scrap. This is surprising, given that setting up a trading account costs nothing. A prerequisite of trading is access to clearing. Without that, opportunities that arise to lock-in advantageous prices (if gate prices rise or buy prices begin to weaken) can never be taken.
As it stands, when East Coast scrap prices rise or fall, exporting firms simply look on. Midwestern prime scrap buyers ponder where prices will be next month rather than locking them in. A default position of “waiting for liquidity to grow” is as fatalistic as selling on a “to be determined basis.”
If companies have a real interest in the ability to hedge risk, they need to register to trade and begin trading small volumes. This encourages others to do the same and smoothens the learning curve as companies book trades on small volumes.
One thing that has not been discussed here is the East/West split and huge liquidity within China.
In stark contrast to the West, ferrous derivatives volumes in China have been staggering. While many point out a natural cultural interest in risk taking in China, which has been amplified by the openness of contracts to “retail” investors (i.e., individuals as well as corporate entities), the fact is that the huge liquidity of contracts makes them immediately useable by corporate entities.
An example of this liquidity can be seen in coking coal. In its first six months of operation, the Dalian exchange’s contract has reported 49.3 million lots traded. That represents 3 billion metric tons of metallurgical coal, or 12 times the entire physical seaborne market. While only 6 percent of that total was traded by corporate entities, average daily trading of 404,000 lots is attractive to industrial companies looking to book trades. Existing rebar and hot-rolled coil contracts are abundantly liquid.
This has medium-term implications. These contracts are currently accessible only to companies that have a footprint in China; but, which large-scale firms do not have a footprint in China presently? If market participants use these contracts, simply in light of their liquidity, this could retard the development of derivatives markets in the West.
Secondly, Chinese liquidity centers will not remain “walled off” forever. A European firm can easily set up to clear American contracts, and a U.S. firm can set up to trade on the Singapore exchange, so it is entirely reasonable to expect Chinese clearing houses to open up in time.
China is moving toward full renminbi convertibility as well as toward making its exchanges internationally accessible. If non-Chinese exchanges have not developed, it is possible that China will have ended up controlling the centers of ferrous trading after all.
Ferrous derivatives are not going away; price certainty is simply too useful. The only questions are: When will it develop and where?
Tim Hard is director of steel and scrap at The Steel Index, www.thesteelindex.com. He is based in Singapore.
Environmentalists around the country have been pushing for a “sustainable plastic,” and companies have responded with what, at first glance, seems to be the silver-bullet solution: degradable plastic.
Degradable plastic in its many forms has penetrated the market with various claims of eco-friendliness; life-cycle completion; organic recycling through biodegradation and composting; and their use of renewable resources in production. These claims tap into environmentalists’ goal, and I can say this because I am an environmentalist and remember feeling a sense of relief at the first sight of “green plastic.”
However, much confusion still surrounds the different types of degradable plastics, their proper disposal and the environmental benefits they offer.
States are trying to increase their plastic capture rates to meet demand for recycled plastic feedstock from manufacturers. North Carolina, in particular, has recently doubled the recycling rate for plastic bottles and is still working to increase that number to meet demand. According to the North Carolina Department of Environment and Natural Resources (NCDENR) 2013 Study on the Effects of Degradable Plastic on Recycled Feedstocks: “[D]egradable plastics are a cause of concern, and particularly when degradables are used in bottles and other containers that are being increasingly captured in collection programs.”
Plastic recycling processors and manufacturers who use recycled plastic to produce consumer goods have proceeded with caution. Uncertainty concerning costs and end-product integrity in light of the introduction of degradable plastics into feedstock for recyclers remains. In the case of degradable plastics, education is lacking to inform consumers of the proper disposal method for each type of degradable plastic, and consumer behavior dictates the success of a recycling program in a particular community, state or region.
Degradable Plastic Breakdown
There are basically two different types of degradable plastics: neat plastics that degrade and plastics with degradable additives. Each type of degradable plastic was created with a different optimal end use yet frequently claim recyclability as well.
The neat plastic that degrades may be a bioplastic that is composed of plant-based resins designed for composting. Not only are there biobased bottles designed for composting, for example polylactic acid (PLA) bottles, but there also are biobased bottles designed for recycling, such as biopolyethylene. However, the bioplastics intended for composting will not break down in a typical backyard compost operation; these bioplastics instead are intended for commercial composting programs that produce the proper conditions for material breakdown as well as for storage.
Degradable additives can be further broken down into two categories: microbial additives and oxo-biodegradable additives. The additives essentially make up less than 2 percent of the standard plastic product, for example a PET (polyethylene terephthalate) bottle, and claim biodegradability in commercial composting facilities, landfills, anaerobic digesters or bodies of water. The microbial additives attract microbes in landfill or soil environments that consume the PET bottle. The oxo-biodegradation process requires sunlight, air and water, which cause the plastic to break into small pieces as it loses its structural integrity. This type of additive is primarily useful to abate environmental issues associated with litter as it cannot operate in a landfill or compost facility nor can it be recycled using traditional processes. Despite the intended disposal method, both of these types of degradable plastics often also claim recyclability.
After reviewing these different types of degradable plastics, the cause for consumer confusion should be evident. What are consumers to do when they buy bottles containing degradable plastic or a bioplastic bottle? It is unlikely that consumers will research the type of plastic used in the bottle to uncover the intended method of disposal. Hopefully, consumers will not toss these bottles out of the window or into the ocean because the bottles say they are made from plants and will go back to nature.
As in many multifaceted environmental subjects, education is the key to success.
The Degradable Problem
Recycling is used to create a second life for plastics, and the recycling industry continues to work hard to protect the integrity of recycled products as well as to increase the amount of quality reclaimed materials. However, biodegradable plastics can compromise this second life.
Recycled plastic is used as feedstock for consumer goods across the Southeast’s manufacturing sector, providing more than 6,000 jobs. At the core of the recycling industry is the goal to provide the highest quality recycled product that is competitive with virgin plastic material. However, the use of degradable additives can render a product nonrecyclable, limiting the life of a plastic product to one cycle versus the potential to become a market-ready consumer product again and again.
The term “degradable” highlights the problem the recycling industry has with allowing these plastics into the recycling stream. Some of the bioplastics or plastics containing degradable additives are activated at certain levels of heat or exposure to sunlight. When material has the chemical instability to degrade under any number of conditions, the quality of that recycled material is immediately compromised. Studies conducted by various organizations outline the concerns surrounding the breakdown and fragmentation that result from the oxo-degradable additive as well.
If recycled, these plastics end up in the same recycling stream as PET or HDPE (high-density polyethylene) bottles that do not contain the additives. Therefore, the degradable plastics bring their additives to the recycling stream, introducing instability. As a result, not only are recycled plastics processors feeling insecure about the quality of their recycled products, but manufacturers who purchase that feedstock to produce consumer goods also are wary of recycled-content product safety and quality.
A Possible Solution
In 2012, the NCDENR began extensively researching all sides of the argument, talking with industry leaders and gathering opinions from those most affected by the introduction of these new products in the recycling stream. Technology and equipment to operate at high-speed and at industrial volumes do not exist for some types of degradable plastics, and those that do exist for separating some forms of biodegradable plastics from standard plastics are expensive and add steps to the recycling process. Time is money in any business, and the potential in terms of the loss of quality feedstock, total recycled yield or reduced quality of the reprocessed plastic poses major threats to the recycling industry.
North Carolina is home to more than 16 companies in the plastics recycling industry that are responsible for more than 1,400 jobs. These companies put themselves at risk when degradable plastics end up in their feedstock. Imagine an 18-wheeler using strapping that contains recycled plastic to hold its load in place driving along the interstate. This strapping happens to contain a percentage of degradable components from degradable bottles that claimed to be “recyclable.” The heat and sunlight that strapping can endure during the shipping process introduce tremendous risk. The public risk involved in this scenario highlights a company’s responsibility to uphold its reputation for delivering high-quality recycled materials.
Recognizing the value plastic recycling has in North Carolina, the state legislature passed a bill in 2005 that bans plastic bottles from landfill disposal. The amount of reclaimed plastic bottles has doubled in North Carolina since the bill’s passage and helps to meet the demand for recycled plastics not only North Carolina but also throughout the region.
The North Carolina legislature then passed House Bill 315 (HB 315) in the spring of 2013 outlining the labeling of plastic containers. To better educate consumers and to protect the recycling industry, HB 315 places labeling requirements on rigid plastic containers that claim to be degradable, biodegradable or compostable. The labeling requirements for these containers should instruct consumers not to place them in a recycling bin. The labeling requirements also help consumers to understand how to properly dispose of the container. The bill, however, does not prohibit the sale or use of any material.
North Carolina moved forward with this legislation to protect the integrity of the recycling industry. This approach, coupled with more consumer outreach and education, will help to protect and promote the integrity of the recycling industry in the Southeast.
Remaining a Priority
Until there is more certainty and more affordable options for separating the degradable plastics from recycling feedstock, the industry will continue to push back across the Southeast to protect the plastic recycling stream. HB 315 placed the labeling requirement for degradable plastics into the existing statute that incorporates the resin identification code (RIC), which keeps North Carolina consistent with the uniform RIC. Therefore, there is no negative affect on existing practices; instead, there is additional language to clarify the newly introduced degradable plastics found in the waste stream. The bill does not ban degradable plastics but offers opportunities for the science and markets surrounding degradable plastics in the recycling stream to be further developed.
Brevard, N.C.-based Southeast Recycling Development Council (SERDC) Executive Director Will Sagar says: “Plastic recycling is a strong and growing industry. Emotional reaction to littering and landfill disposal has created a market opportunity based upon a perceived greener plastic. This advertising should not be allowed to derail a vibrant industry that provides true environmental and economic benefit.”
He adds, “Steps to educate the consumer for proper choices should be continued to lead to proper reclamation and reuse of reliable resin.”
It is the hope of industry leaders and organizations such as SERDC that other states will follow North Carolina’s example to require plastic labels to educate consumers according to the appropriate functionality of the plastic makeup. This awareness will ultimately allow plastics to be more environmentally friendly through reuse and recycling by removing society’s temptation to believe that degradable, biodegradable and oxo-degradable plastics or the like are the silver-bullet solutions to our waste problem.
The author is program manager for Brevard, N.C.-based Southeast Recycling Development Council (SERDC) and can be reached at email@example.com.