APRIL 2009

Scrap metals industry shows cautious optimism

Electronic Exports E-mail the author

The pulse may be faint, but there are signs of life in the scrap metal business. Opinions on the state of the market and future prospects are mixed, however, ranging from pessimistic to mildly optimistic. Even so, most all the metal recyclers interviewed are operating with a tight rein on operating costs and holding their breath.

Dramatic slowdowns by United States scrap generators in heavy industry, manufacturing, especially automotive, aerospace, machinery and their suppliers, and in construction have led to tightening supplies of scrap metals. Scrap metal dealers, brokers and processors are finding it harder to acquire scrap and traveling farther away to secure it.

Severe winter storms across many parts of the country compounded shortages. Some believe that scrap metal commodity prices have bottomed out and are slowly beginning to recover.

Looming over everything are the yet unknown ramifications of the Buy American provision included in the recently passed $787 billion American Recovery & Reinvestment Act. No one seems to understand exactly how the legislation will be implemented or how it will affect scrap steel exports.

A firestorm of protest from many countries and several leading United States manufacturers has caused Washington to moderate its position. It seems likely that federal contractors will be politically motivated to use domestically produced steel on infrastructure projects while our government walks a tightrope to meet World Trade Organization fair trade codes and trade treaties with foreign governments. 

In any case, billions in United States stimulus spending should increase demand for scrap metals as well as create a stream of scrap to ease up shortages.

Domestic Scrap Shortages

An example of the shortage of scrap was provided by Universal Scrap Metal (USM) based in Chicago. It is one of the Midwest’s largest wholesalers and processor of scrap metal and a major processor of non-ferrous scrap. USM buys non-ferrous, ferrous, precious metal bearing, used beverage cans, hi-temperature alloys, electronic and composite metal scrap from industrial and manufacturing companies, recycling centers and independent scrap dealers. “The only encouraging sign we’ve seen is on the sales side. We can sell whatever we can produce. Prices we can get are good in relation to where the prices are in the marketplace. It’s just that we can’t find metal,” said Phil Zeid, USM’s president and CEO.

Titanium chips are boxed and ready for processing.

Back in November, USM had problems selling, but now customers are calling and need metal. Zeid believes that demand is only growing from the standpoint that his customers are using up existing inventory, not necessarily because their business is getting better.

“I’ve been in the business 26 years. Usually when you see a recession in the metals market, copper may get strong and aluminum might get weak, stainless may get weak and steel gets strong. There is always some balance where some metals or a group of metals is strong. In this case, everything has plummeted, but also the volumes have come down dramatically. We could live with these prices if we had the volume to sustain the business.” Zeid lamented.

When Kurt Rexius, CEO of P&T Metals Corporation, a large metal recycler in the Los Angeles basin was queried about how business was, he had a one word answer: “Terrible!”

But then he seemed somewhat optimistic and said that prices have seemed to stabilize over the last three or four weeks. “Prices are in a range where we can operate our business successfully, but it’s still a difficult time. Margins and prices have come down and they’ve actually stabilized, but at a much lower price than they were just a year ago,” he said. “Prices have come up since January, roughly 10 to 15 percent. I think the market has bottomed.”

P&T’s biggest problem is also the supply of scrap. Scrap availability on the west coast has been dramatically affected by slowdowns in aerospace and home construction. The machinists strike last year at Boeing dropped 2008 production by 15 percent. Many domestic and international airlines have either reduced orders or put contracts on hold. Fifteen of Boeing’s 787 Dreamliner orders were cancelled. Boeing plans on cutting 10,000 jobs, or 6 percent of its workforce this year. Production at recreational aircraft companies has slowed and business jet manufacturing has virtually dried up. “Directly and indirectly, approximately 35 percent of my business comes from aerospace,” said Rexius.

To acquire more scrap, P&T is being more aggressive on price and going farther away to buy it, even buying out of state. “When business is good people tend to pick the low hanging fruit, now everyone has to reach out to get scrap, which of course drives your margins down due a larger investment in time and higher transportation costs.”

About 60 percent of P&T’s scrap metal is exported, primarily to Taiwan and China with minor shipments to Japan. Rexius reported that his orders for exports are actually starting to pick up, mostly from China.

Arthur Ames Scrap Metal, based in Newark, New Jersey is a wholesaler that buys a full range of scrap metals from factories in and around New York. Arthur Ames buys all types of scrap metal, warehouses it and sells most of its inventory domestically to companies that may or may not export. Steve Mersky, vice president of Arthur Ames commented on market conditions: “Scrap metal is like the rest of the world now. The conditions are not great, business is off and prices are much lower than have been over the past few years. But this past week, all of a sudden it’s starting to inch up a bit. I have a feeling that it might open up shortly.”

International Demand

On the international front, scrap metal volume seems to be recovering. “We are seeing very strong demand for scrap in China and as unusual as it may sound it’s still an expanding economy, which is good,” said Bob Stein, vice president of non-ferrous marketing and president of the bureau of international recycling non-ferrous division at Alter Trading Corporation.

Stein confirmed that there is strong demand for non-ferrous in China and that Alter sells there everyday, even through the slowdown in the Chinese economy has weakened their currency against the dollar making United States scrap metal more expensive there. Most of Asia is in the same predicament as Western Europe and the United States because of cut-backs in auto production. “The worst hit of all the metals is secondary aluminum. That is an international phenomenon because a lot of that product goes to the automotive industry,” said Stein.

India is a different story. Not only has their economy slowed down, but their currency has also weakened against the dollar making United States scrap metal even more expensive than in China. Despite the slowdowns in China and India, Stein reported that he can sell every pound of non-ferrous scrap that Alter can produce.

According to Stein, scrap inventories are low in China and Asia, especially copper. “Copper prices seem to be in a nice trading range, certainly when at the upper end of that trading range. Four or five years ago we were sitting here scratching our heads wondering if copper would go over a dollar. It hit $4 dollars last spring, but those were explosive times and they were not reflecting the true fundamentals of the market. It was highly speculative and most speculation is out of the market, so maybe now a buck and a half is the right price for a pound of copper,” said Stein. “I have a moderately optimistic outlook. We’ve already been in a recession for a year and these things usually last about 18 months to 2 years. There is light at the end of the tunnel.”

Governments all over the world are pumping huge amounts of money into their economies in the form of bailouts and guarantees. It may not have an immediate impact, but it should shortly begin to stir economies, get people buying and get people back to work.

“We are cautiously optimistic that infrastructure spending in the United Sates, in China and other countries will help jumpstart prices and demand for our commodities. Our theory has always been it’s not a question of if it will rebound, it’s a question of when,” said Bruce Savage, vice president of communications at Institute of Scrap Recycling Industries.

Things are always clouded by the events of the day, we always think it’s going to be terrible forever, but it is not.