Metals market ponderings
The demand for metals is recovering from the
declines that began in 2008. This has affected the entire metal
industry – from recyclers to producers. While recovery has begun,
the ongoing economy is still affecting the industry.
Bob Garino, Institute of Scrap Recycling
Industries, Inc.’s director of commodities, offered his perspective
on where the market has been and where it is heading.
Has the market for raw and recycled metals
recovered from 2008?
Garino: We found 2008 to be a most difficult
year for the recycling industries. Last year saw some manufacturing
and service industries react favorably compared to the lows experienced
in the first two quarters of 2009. However, other industries
– the housing and automotive sectors especially, languished through
most of 2009. The Earth Policy Institute has estimated, that
for the first time since the Second World War, that more automobiles
were scrapped last year than were purchased.
While 2009’s global gross domestic product
(GDP) decreased by 1 percent, according to most published sources,
the American GDP dropped by 2.4 percent – the biggest annual
rate of decline since 1946. From the perspective of the metals-intensive
industrial production sector, recovery and economic growth did
not occur in North America, but in China and India showed 8.7
and 6.4 percent GDP growth rates respectively. In fact, China
should receive most of the credit the global increase in the
value of several metal and non-metallic commodities in 2009.
The United States Geological Survey noted
that despite some “green shoots” of recovery, overall domestic
metals production declined last year to its lowest level since
2005. The ongoing recession continues to curtail the domestic
consumption of basic raw materials. This translated into the
quantity of metals production falling by 7 percent and the attributed
value of those materials falling by 22 percent to $21.3 billion.
How have declines in metal consumption for
raw and recycled materials affected production, consumption and
prices of metals?
Garino: ISRI research determined that the
nations scrap recycling industry mirrored and exceeded the pain
felt in the larger economy. This translated into a 36 percent
decline in value compared with 2008. The volumes of ferrous scrap
processed dropped by 27 percent, while major nonferrous metal
volumes fell by 15 percent. Even scrap exports were affected.
This sector – roughly 40 percent of the industry’s overall value,
declined by 25 percent despite an increase in volume.
Despite the declines of 2009, we see that
last year’s price trends are those of markets which are recovering.
This has been supported by United States government stimulus
spending, Chinese demand and currency considerations.
It should be stressed that annual comparisons
with 2008 magnified the depth of the recession that began at
end-2007. This explains the analysis of Macquarie Research, which
determined 2009 to be a weak year for global commodity prices
overall – average base metal prices falling 27.2 percent year-on-year,
and steel falling 45 percent. The Dow Jones-UBS Commodity Index
found that last year’s index was nearly 41 percent off the peak
that was attained in 2008, despite a roughly 19 percent growth
Precious metals led last year’s overall index,
but base metals such as copper also made a contribution. This
was reflected in the LME Index price for copper, which averaged
$1.48/lb. in January 2009 and increased steadily throughout most
of 2009. By December the price increased by 115 percent to an
average price of $3.18/lb. While other metals regained considerable
ground in terms of value, it was not an across-the-board affect,
which was clearly demonstrated by the American steel industry.
The LME Index rose an astonishing 87 percent
over last year on slightly lower trading volumes, with noticeably
higher LME-held inventories for the six major nonferrous metals
traded on the exchange. Credit for this should be given to China’s
insatiable demand for base metals.
How has the decline in the value of metals
affected the profitability of firms large and small, and how
have declines in revenues affected the ability of these firms
to purchase materials at a low price and build up stockpiles
to be ready for a market recovery?
Garino: The processing side of the industry
is a high volume/low margin business and the scrap processing
industries were hurt by low volumes and low prices. Add that
to credit constraints on their ability to even buy scrap. This
has really created a very difficult situation for most of the
companies that process scrap in 2009. Although the trend for
prices in 2009 was positive, it was coming off such a low that
when you compare the average price performance for 2009 versus
2008, it was a difficult year.
It has also affected those who sell scrap
to the processors. Scrap flows slowed down. That was pretty apparent
in iron and steel for example. It’s a two-fold problem – you
have less new scrap being generated as manufacturing slows and
you had lower prices that discouraged a lot of obsolete scrap
from coming in, plus you also had a lot of scrap come out of
the woodwork in the first half of 2008, which coincided with
the price peak.
Where do you see the metals market in the
next three years? Are there any trends that people should note?
Garino: We do not forecast, but do look at
the metals intensive manufacturing component of industrial production
as an indicator. The number comes out every month and there is
a very high correlation with that index matched against prices,
whether it is the LME Index, the Commodity Research Bureau Index
or even our own ISRI Scrap Metal Index. As the indexes go, so
do prices and we would expect to see industrial production continue
positive. What we are seeing now, looking back to between 2007-2009,
is a cyclical downturn, but at the same time, the secular trend
(long-term) is very positive and will be for many years to come.
For the most part, we have gotten through the cyclical downturn.
We realize that this is a difficult time
for the industry, but recyclers and processors have to realize
that they are in it for the long-haul. It’s just a matter of
maintaining proper diligence in costs and that best practices
are more important than ever.