APRIL 2009

International metals trade hit by downturn
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The worldwide economic slowdown is hurting the international trade of scrap metal. As demand for scrap drops, exports and imports are slowing to a crawl.

“International trade has decreased dramatically over the past year,” said Jeff Solomon, chief executive officer of scrap dealer and buyer Globe Metal Recycling Services Inc. in Montreal Quebec, which processes industrial-generated metals.

Solomon said the current economic downturn is unique. When the downturn started, economists first predicted that the slowdown would not be as severe worldwide due to the growth in emerging countries such as India and China. However, globalization has dragged these markets into the current negative economic quagmire as well.

“The North American downturn and the European downturn have negatively impacted all economies and we now have a global recession rather than a regional one,” Solomon said, adding that he is not sure what to expect for the rest of this year.

Because the prices for metals have dropped below the cost of production in some cases, Solomon said, some producers have curtailed production. Often the prices do not cover the cost of transport and processing. Therefore, if this continues much longer, Solomon said, scrap processors might enact a fee to cover the cost of removal.

“As the price of scrap drops, the radius of economic shipping costs becomes an issue and you can’t ship the goods as far as you could before,” Solomon said.

The downturn may be considerably deeper than even what the International Monetary Fund (IMF) forecast earlier this year, according to the chief economist for the Organization for Economic Cooperation and Development. “This recession will deepen… there’s no doubt,” Klaus Schmidt-Hebbel told Reuters in early March.

The IMF cut its economic forecast in late January for global growth of only 0.5 percent in 2009 from an earlier prediction of 2.2 percent. The IMF also forecast a 2 percent slide in economic output this year for the world’s most advanced economies.

Economic conditions throughout the world continue to look worse with each month that goes by and many economists continue to downgrade their expectations, said John Mothersole, senior economist at IHS Global Insight Inc. in Washington D.C.

“While we continue to see recovery, or at least a start of a recovery, in the latter half of this year, that recovery comes off of a lower base,” Mothersole said. “We continue to downgrade the immediate outlook and therefore push the recovery back.”

Mothersole doesn’t expect a recovery in developed markets until 2010.

“Trade flows have been reduced as a part of the global recession and that certainly includes the scrap metal trade,” Mothersole said. “It simply reflects that less stuff is being made and therefore there is less waste material and less material moves back and forth.”

Despite all the negative economic indicators, there is some encouraging evidence that international trade in scrap metal might be improving. Mothersole cited the Chinese purchasing managers’ index, which rose to 49.0 in February – the highest level in five months and the third consecutive rise. While a reading below 50 indicates contraction, Mothersole said the rising number indicates that China might be starting to stabilize.

“If that is the case, it is a hopeful sign,” Mothersole said. He said this might be the reason behind why the reports about scrap metal being refused delivery in Chinese ports have stopped. Late last year there were numerous reports about companies breaking contracts and importers finding excuses, refusing to take delivery of scrap metal.

Bob Garino, director of commodities at the Washington D.C.-based Institute of Scrap Recycling Industries Inc. – a trade group which represents over 1,600 companies that process, broker and consume scrap commodities – confirmed that the problem of contracts not being honored by importers of scrap metal in China has stopped.

“There are still issues out there that have to be resolved,” Garino said. “But we’re not hearing of any new cargoes in route where the buyer has decided to walk away.”

Despite the falling economy and reports last year of some importers refusing shipments of scrap metal, Garino said there have not been any problems with new tariffs being imposed or reports of dumping hurting the international trade of scrap metal.

Last year, in fact, was another record year for exporting scrap metal, Garino said, with the United States continuing to be the largest exporter of scrap metal. The largest importer of non-ferrous scrap is China and the largest importer of ferrous scrap is Turkey.

Ferrous scrap exports were up 37 percent in 2008 compared to 2007. Aluminum was up for the year by 28 percent. Copper, however, was only marginally higher.

“Every year we have seen year on year increases,” Garino said. “But we definitely saw a change as the fourth quarter came about. The buying dried up drastically.”

What will happen this year? Will trade pick up? Garino said it is hard to forecast. He said it depends on whether the stimulus packages that have been introduced around the world work. As industrial production increases, Garino said he looks at the manufacturing component of industrial production, because it is metal intensive.

“As that begins to turn around in a positive direction, metals will increase,” Garino said. “That should help drive metal demand and scrap metal demand.”

The biggest issue in regards to the trade of scrap metal is the macro-economic picture from around the world, Garino said. “It all goes back to industrial production globally. Without that as the driver for metal it is hard to imagine volumes turning around until we start getting concrete evidence that industrial production has picked up.”