April 2008

ON TOPIC



Robert J. Garino

Demand remains strong for metals in 2008

The demand for scrap steel continues to soar, as do the prices. Nations such as China and India continue to import enormous quantities from the United States.

This is also the case for non-ferrous metals, which are key staples in the production of construction materials, industrial applications and consumer products for daily use.

Recycling firms that specialize in metals recovery are generating substantial profits and making greater efforts to recover these materials.

In the following interview, Robert J. Garino, director of commodities for the Institute of Scrap Recycling Industries, Inc. (ISRI) provided his take on demand and prices for key metals in 2008.

Question: What do you foresee in terms of the international demand for scrap steel and the prices that scrap dealers can charge for this commodity in 2008?

Answer: For domestic steel producers and ferrous scrap consumers, the early 2008 outlook appears to be reasonably positive. Goldman Sachs (New York) for example, saw risks in demand based on last year’s “sluggish” fourth quarter, but it also predicted “some improve-ment” in the first half of this year, “if only due to seasonal patterns.” However, it expected U.S. auto production to be lower this year.

Nevertheless, most analysts today are more confident than ever that domestic mills will be able to raise prices, even if demand remains weak, because of the country’s net supply shortage of finished steel, relatively low levels of inventories and reduced imports.

Several steel analysts also see cost pressures building that could underpin finished steel prices this year.

On the price front, earlier estimates for finished steel such as HR coil and No.1 HMS were under the price response to date. Since ISRI does not forecast prices, we’ll leave that exercise to others.

Question: Over the past number of years China has been exporting a serious amount of scrap metal to the U.S. Is this expected to continue?

Answer: In 2007, for the fourth consecutive year, global steelmakers surpassed the billion ton mark in their crude steel production, with China serving as the dominant producer.

It is estimated that China’s crude steel production ended 2007 around 490 million mt, representing more than one third of total global output. Even though it consumes the vast majority of its production domestically, China has become a major steel exporter. Steel analysts note that China’s exports in 2008 may be the swing factor in the global steel market balance. Forecasts by the China Iron and Steel Association place 2008 crude steel production at 540 million mt, which would be a 10 percent increase over 2007.

Locker Associates (New York) expects the Chinese government will curb the country’s steel production. Other factors also could mitigate China’s global impact and influence on prices for both finished steel and scrap, including export taxes, the elimination of value-added tax rebates and a continued strong internal demand.

Question: What is your take on the production of steel in the U.S. for 2008 and the situation regarding imports?

Answer: The American Institute for International Steel (AIIS) projects that steel shipments last year reached 104.5 million net tons, down from the 109.5 million tons shipped in 2006. Despite this decline, it expects U.S. steel consumption to increase due to de-stocking.

The AIIS also estimated total U.S. steel imports at 33.5 million tons in 2007, compared with 45.3 million tons in 2006. U.S. exports of steel soared last year, reaching a projected 10.9 million tons compared with 9.7 million tons the previous year.

Question: Will demand and prices for copper continue to climb?

Answer: For 2007, market watchers expected new copper supply to rise at least as fast as consumption, ­­leading to a statistical surplus for the year.

While the World Bureau of Metal Statistics and International Copper Study Group reported metal deficits through most of last year, ICSG’s October forecast projected a 110,000 mt surplus for all of 2007. In 2008, ICSG expects a larger surplus of about 250,000 mt based on estimated global consumption of 18.7 million mt against projected refined copper output of almost 19 million mt.

Some analysts maintain, however, that copper will not be oversupplied due to current conditions.

Others contend that global consumption, led by China, is always understated and that overall consumption will post a year-on-year increase despite an assumed slower pace of Western World industrial production and metal usage in 2008.

For this year, the price forecast - distilled from projections in fourth-quarter 2007 and perhaps overly influenced by the upbeat sentiment at LME Week in the second week of October - is for copper to average about $3.10, with predictions ranging from $2.61 (Natixis, New York) at the low end to a high of $3.68 (Mitsui Bussan Commodities, London). This consensus price is positive compared with Reuters’ July 2007 midyear forecast of $2.85 a pound.