A slow start

Ferrous scrap’s status as a leading economic indicator (often touted as such by former United States Federal Reserve Bank Chairman Alan Greenspan) may be pointing to tough times ahead for the global economy if early 2015’s pricing trends are any indication.

A number of factors are being cited by scrap traders and processors for the falling prices, with the finished steel sector’s supply and demand scenario serving as a predominant theme.

When it comes to ripple effects caused by the steel industry, what takes place in China now dominates the conversation, as that nation is responsible for approximately half of the world’s steel output.

Many steel analysts foresee 2015 as either the peak year for China’s steel production or the first year of a gentle but steady drop-off in production. To what extent this happens and to what extent it will influence the ferrous scrap market are among the leading sources of concern for scrap recyclers in 2015.
 

Respectable introduction

If the ferrous scrap market has truly entered perilous times in 2015, the lead-in to the drop-off contained mixed signals in the form of pricing and industry statistics in 2014.

Global steel production rose modestly in 2014 compared to the year before, according to statistics gathered and published by Brussels-based trade association Worldsteel.

World steel output increased by 1.1% in 2014, rising to 1.637 billion tonnes from the previous year’s figure of 1.618 billion tonnes. World leader China’s output rose 0.9% from 815.3 million tonnes in 2013 to 822.7 million tonnes in 2014.

Looking solely at steel output figures as a barometer for iron ore and ferrous scrap demand, 2014 featured a stable business environment with some regional fluctuations.

In addition to China’s 0.9% growth, steelmakers in the United States produced 1.7% more steel in 2014 than they did the year before, rising to 88.3 million tonnes of total output.

Steel production in the European Union rose by almost an identical percentage, at 1.8%. Total EU steel output in 2014 was 169.2 million tonnes, up from 166.3 million in 2013.

Production in Turkey (a leading destination for exported ferrous scrap from the U.S. and European Union), however, fell by 1.8% in 2014, with output declining by some 600,000 tonnes.

Among the solid performers in 2014 were: South Korea, up by 7.5% or nearly 5 million tonnes; Saudi Arabia, with output up by 15.0%, or more than 800,000 tonnes; and Mexico, which produced more than 750,000 tonnes of steel compared to the year before, for a 4.2% increase.

Two nations with dramatically reduced outputs suffered from geopolitical and internal economic woes, respectively: Ukraine, where production dropped by 17.1% or more than 5.5 million tonnes; and Venezuela, with a 31.5% output decline on the order of 650,000 tonnes.

Regional disparities notwithstanding, 2014 was a year of stability in steel production and, correspondingly, in ferrous scrap demand.

Some of the early news in 2015, however, has been raising doubts that the era of stability will continue much longer. China’s ability to continue posting annual steel output increases is especially in doubt, with forecasters almost unanimously predicting that the streak is likely to end.

A report from the investment banking firm Morgan Stanley released in early February 2015 forecast enough momentum in China’s economy to keep steel output stable or even slightly rising in 2015, but identified this year as likely the peak year for steel output in the country.

An early sign of China’s possible decline ahead of that schedule was revealed in the January 2015 iron ore import figure. In early February, China’s General Administration of Customs agency reported that the nation’s iron ore imports in January fell to 78.57 tonnes, down from 86.85 million tonnes the previous month and from 86.83 million tonnes in January 2014.

Scrap recyclers appear to already be feeling the effects of what could be a major slowdown in steel output looming in China.
 

Ripple effects

Just as China’s enormous growth in steel output from 2000 to 2014 helped boost iron ore and ferrous scrap pricing, the slowdown in China in 2015 is taking shape as a market influence that is resulting in negative symptoms.

After witnessing ferrous scrap prices drop below $400 per ton in October 2014 (and stay there), scrap processors and traders based in the U.S. endured another sharp price drop in early February 2015.

Buyers from mills in the U.S. and those representing overseas destinations offered prices in the $227 to $240 per ton range for heavy melting steel (HMS) and shredded grades to American sellers in early February.

The export prices marked a steep drop, but those prices had been drifting steadily downward for several months in a row. American mills, meanwhile had been paying relatively stable prices between October 2014 and January 2015, until the February buying period played out.

“Markets are real ugly,” said a ferrous scrap buyer in the U.S. Midwest in mid-February, “and it doesn’t look like it is going to change anytime soon.”

The buyer adds, “Steel mills are under a lot of pressure and the export market stinks because the U.S. dollar is strong.”

Mills in the Chicago area were able to buy No. 1 busheling for $255 per ton in early February, according to American Metal Market (AMM), while shredded scrap dropped to $245 per ton and No. 1 HMS was purchased at $230.

After the February price drop left scrap processors reeling, they were left to decide whether to prepare for a trough of considerable duration or to be ready if prices rebound should the U.S. have a busy spring construction and automotive sales season.

One potential signal that March prices could stabilize or even rise in the U.S. was the reported return of bulk ferrous scrap cargo buying at U.S. ports. AMM reported in mid-February that shippers on both the Pacific and the Atlantic Coasts of the U.S. booked bulk shipments, with buyers from China and South Korea buying at the new lower prices off the Pacific Coast and buyers from Turkey coming back into the market on the Atlantic Coast.

How North American mills react to the prospect of renewed competition for scrap generated in the U.S. may determine whether ferrous prices bounce back up as soon as March. On average, steel mills continue to run at about a 75% capacity in the U.S., although the first week in February 2015 did witness a 3% drop in U.S. steel output compared to the week before.

While a 75% capacity rate is well below where steelmakers in the U.S. wish to be, the figure is one to envy in India. Scrap recyclers from that nation gathered in early February 2015 to converse about the state of their industry.
 

Appearances can be deceiving

Judging by some statistics, India’s overall economy and steelmaking sector appear relatively healthy. With China’s GDP growth rate settling back to around 7%, India is poised to compete with it for the fastest growth rate among large economies in 2015.

The nation’s steel industry grew by 2.3% in 2014, producing 83.2 million tonnes of steel—nearly twice as much as Germany and only 5 million tonnes less than the United States.

Indian scrap recyclers and metals producers who gathered for the Metals Recycling Association of India (MRAI) meeting in Mumbai in early February 2015, however, discussed a steel industry that could be running at as low as 50% capacity.

MRAI President Ikbal Nathani of Mumbai-based Nathani Industrial Services pointed to a flood of low-priced steel billets pouring into India as a problem on the sales end for Indian steelmakers while an import duty of from 2.5% to 5% on ferrous scrap causes pain on the operating costs side.

“India is the only country in the world where there is an export duty on scrap and an import duty on scrap,” stated Nathani.

The import duty has harmed both recyclers and steelmakers, said Nathani, “and now China is dumping billets [at] the price of our scrap.”

Speaking to government ministers in attendance, Nathani mentioned that one year ago at another MRAI event, a government spokesperson had promised “that help will be given.” One year later, the import duty still in place, “Next year this industry will absolutely shut down” if the duty is not repealed, Nathani declared.

Presenters at the MRAI event also offered ideas on how and whether India can collect more ferrous scrap from within its own borders.

One potential bright spot is the abundance of vehicles (four-wheeled, two-wheeled and even three-wheeled auto rickshaws) that have been streaming onto India’s roads during the past several years.

Although drivers in India are likely to extend the lives of vehicles until they cannot be driven another kilometre, the sheer number of additional vehicles hitting the road each year will lead to a greater number of end-of-life vehicles (ELVs) in India in the next five to 10 years.

Mohan Agarwal of India-based aluminium producer Century Metal Recycling told MRAI delegates that India has risen to become the seventh largest automaker globally and the second largest producer of two-wheeled vehicles (motor scooters and motorcycles).

Presenter Goto San of Toyota Tsusho said his company’s forecasts show that India’s passenger vehicles sales may zoom from 2.2 million vehicles sold in 2010 to 4.6 million units in 2015 and then 10.6 million units in 2021. He said the ELVs will become “an important part of urban mining resources in India,” and added that for companies like Toyota Tsusho, the opportunities in India are promising.

A stream of ELVs in India would be a welcome development for recyclers. A study conducted for the MRAI by Frost & Sullivan and summarised at the February meeting by Venkatesan Subramanian, who works for that research firm in New Delhi, found that India’s current scrap iron and steel recycling rate may be as low as 11.6%, while other estimates put it closer to 20%.

The low recycling rate, said Subramanian, runs in tandem with a steel industry in India that has a “low scrap utilisation rate as against developed economies such as Turkey, Europe and the U.S.”

While both the GDP and the steel industry of India are growing, some policy adjustments and additional investments in electric arc furnace steelmaking will be needed for India to become a ferrous scrap powerhouse.

The author is editor of Recycling Today Global Edition and can be contacted at btaylor@gie.net.