After enjoying several good years in recycling for most commodities, recyclers will be relieved to know that 1996 is expected to be another good – though not necessarily great – year. As we enter the new year, everyone is watching the United States economy closely to see how it will perform.
In general, 1996 is not likely to be much different than 1995, which was characterized by modest growth and low inflation, according to Douglas Handler, director of research at A.C. Nielsen, Schaumburg, Ill. However, the degree of uncertainty is greater this year than last year. There are several sources of this uncertainty, the most significant of which is federal fiscal policy and the federal budget, still being debated at press time. These issues are normally decided in a more timely manner.
If an acceptable deficit reduction program is adopted and the austerity needed to balance the federal budget is there, the Federal Reserve Board will probably reduce interest rates. "That also is part of the outlook – that we get this austere fiscal policy but it will be offset by good monetary policy, and that’s another reason why we expect growth to be pretty similar," says Handler.
The second risk factor is the state of the stock and bond markets, says Handler, although he says that the lesson of 1987 was that the stock market could fall 500 points and have little effect on the economy. Of more significance could be the approximately 1 percent that people might spend of their windfall if capital gains taxes are cut, which could add $10 or $20 billion to consumer spending.
The third risk factor concerns federal government statistics, he says. Gross domestic product, or GDP, will soon be measured very differently, making statistics look different even if the actual situation has not changed.
"This is the most pervasive revision they’ve ever had," says Handler. "The end result is that GDP growth is actually going to be much lower as measured compared with what we’re used to. For example, if we consider 3 percent growth as moderate, all the changes that are taking place might give us a growth rate of maybe 2 percent or 2.25 percent."
Economies in Europe, Canada and Mexico are currently fairly slow, he adds, so export to those countries will not be great until after the first half of 1996.
Of greatest concern to the ferrous scrap industry are sectors such as construction and automotive, which are expected to continue to hold steady in 1996.
"The construction sector has actually held up pretty well, and lower interest rates, if they come, should help continue the game," says Handler. "For cars as well, the cutbacks we’re seeing are really infinitesimal."
FERROUS MARKETS
Ferrous scrap markets are expected to continue holding firm into 1996, as new minimills come on line and provide increased demand for scrap. "I think the steel industry’s in a good position with the dollar where it is, and cost structure and productivity where it is, and the new market development," says John Jacobson, president of Jacobson & Associates, Rochester, N.Y.
But the existence of new domestic demand is changing the face of the scrap market in the U.S., as more scrap that used to be exported is consumed domestically.
"What happened in 1994 was about 170,000 tons moved from shippers in the Northeast to consumers out West," according to Mark Warren, manager of scrap purchases and operations for Co-Steel Raritan, Perth Amboy, N.J., speaking at a recent ferrous scrap forum sponsored by American Metal Market. "I can only believe this tonnage will continue to grow as new meltshops gain experience."
In the future, says Warren, a number of trends are likely, including the increased emphasis on scrap demand forcing more capital scrap out of the ground, more cross-territorial shipments, increased domestic consumption of materials formerly exported, insufficient supply of low-residual scrap resulting in more use of blast furnace materials such as direct-reduced iron, and a consistently higher price of scrap less tied to steel prices due to flat product minimill demand.
"We’re at a peak in price now, and we’re forecasting a weaker market scenario, with the lowest point in the cycle to occur during 1997," says Warren. "Domestic pig iron may be a bigger factor in the future. As far as future scrap prices are concern, this forecast is based on a downturn in total steel shipments from the U.S. in 1996, a downturn in total steel operating rates for 1997, and a slow recovery starting in 1998."
Although most in the industry agree that there will not be an actual shortage of scrap, despite the additional demands made by new mills coming online in 1996, the cost of scrap, especially premium grades, will undoubtedly climb. Several steel mills, such as Georgetown Steel, use direct-reduced iron for some percentage of their raw material requirements.
Some in the industry are trying to position DRI as a scrap complement rather than a substitute, according to Jacobson, but the reality is that some scrap is displaced whenever DRI is put into a furnace.
"What I think is going to happen is there will be more use of DRI, but at the same time there’s going to be more use of electric furnaces," says Jacobson. "So the overall demand for scrap will continue at current levels, and as long as scrap is the lower cost alternative, it’s hard to resist the availability of low-cost iron units."
Arnie Gachman, president of Gachman Metals & Recycling, Fort Worth, Texas, says the steel products made by new mills coming online will be displacing existing mill products, because the market really can’t hold as much as is going to be available. As a result, the scrap market will actually remain steady, as scrap that used to go to some of the older mills instead is bought by some of the newer, presumably more efficient, mills.
"In addition, the foundries that are left in different parts of the country need a good supply of scrap," says Gachman. "There isn’t an unlimited supply. They’re willing to pay for it and expand the business, and they’re doing it."
NONFERROUS IMPROVEMENTS
Although nonferrous markets were also somewhat sluggish at the end of 1995, most in the industry seem optimistic that the markets for materials such as aluminum, copper and nickel will pick up again this year. Some express concern that Russia will start exporting large amounts of aluminum or other nonferrous metals onto the world market again. If that happens, then aluminum prices will be depressed.
"We’re starting to have some problems with aluminum being dumped again," says Evan Koplin, vice president and general manager of Macon Iron and Paper Stock, Macon, Ga. "All it takes is for stability to go away over there, and who knows what could happen with the markets?"
The health of the U.S. economy is a critical factor, as well, he says. "It doesn’t matter what’s happening with an individual material if the economy’s not booming, cars aren’t selling, or houses aren’t selling."
"The demand appears to be there, especially in the area of copper, although if there’s one that’s a little bit shaky that may level out, it’s copper," says Ron Ebner, vice president of the nonferrous division of Luntz Corp., Canton, Ohio. "On the alloy end, the stainless steel, I think you’ll see a slow period and then you’ll see nickel come back to the point where it could strengthen again."
Aluminum markets will be basically stable in 1996, according to Stuart Cohn, president of Behr Non-Ferrous Metals Inc., Rockford, Ill. "We see a supply that for the next month or two might be a little tighter than normal due to weather conditions, but it will probably be in balance during all that time. And we see some slight variations as far as demand, but overall no run-away highs and no rapid depressions."
In fact, 1997 will probably be a better year than 1996, says Cohn, because automotive demand may be greater in 1997. "If there’s greater demand for more aluminum in cars, then we will end up shipping more aluminum," he says. "And overall, the outlook for worldwide demand in 1997 shows a much stronger year as far as capacity, supply and consumption. All of them will come pretty much into check."
POST-CONSUMER STABILITY
Building on a relatively strong year in 1995 for post-consumer commodities, these materials are likely to remain stable or even grow in 1996, according David Dougherty, executive director of the Clean Washington Center, Seattle.
Recovered paper, which saw record prices at the beginning of 1995 but then experienced a rapid drop in demand and prices, will recover in 1996, he says (see related story in this issue).
"We’re seeing a relaxation of prices now because several mills have closed for maintenance, but they will be up and running again, and as long as economies stay fairly strong, I think you’ll see that shortage again in spring and summer," says Dougherty. "So the prices should go up and stay firm."
Polyethylene terephthalate has achieved an equilibrium between supply and demand, but a large supply of virgin PET expected to come online in 1996 will change the balance. "Prices for recycled PET have been very high," says Jack Milgrom, managing director of Walden Research Inc., Concord, Mass.
By the second half of 1996, as new capacity is being built, virgin PET prices will probably drop a little or stay steady, he says. The same will be true with recycled PET, which tends to mirror the virgin market in price trends.
The other plastic resin commonly collected at curbside, high-density polyethylene, has experienced a lessening of demand from Asian markets, says Dougherty. U.S. producers need to learn from this and build more market capacity to use the material in this country, he says.
"As the Asians build their own petrochemical industries to provide themselves with their own plastics, the Asian market will be less and less a market in the long term. It’s a material we need to focus on developing a lot more capacity for in this country."
However, the recent lowering of recycled HDPE prices has allowed large consumers such as Proctor & Gamble and Chlorox to start using the material again, says Milgrom.
"Prices for HDPE have gone down because capacity restraints have been removed in the latter part of the year," says Milgrom.
The problem with lower HDPE prices is that the margin recyclers can expect to receive has been dropping, he says. In contrast, PET recyclers are making money. But the situation for HDPE will not last forever.
"We are getting close to the bottom price for HDPE. It may drop a few more cents, and then in the last half of 1996 we’ll see increases – not dramatic, but the price will start edging up."
Glass containers, although they are consistently recycled, are not likely to experience much in the way of market fluctuations in 1996, says Dougherty. More infrastructure development is also needed for glass, in order to provide additional markets for the material.
Municipal recycling programs have gained enough momentum during the recent upturn in market prices that they will be able to sustain themselves if the market were to slow in 1996, says Dougherty.
"There’s enough capacity developed now that prices will never go down to where they were in the early 1990s," he says. "We will more find the middle range and trade up and down that range. But we still need to continue to develop new capacity to avoid the valleys being so deep."
The author is editor of Recycling Today.
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