American Recycler, October 2009 - Prices up in non-ferrous industries

It has been a rough year for non-ferrous scrap metal recyclers, but executives on the front lines and experts who track the industry both predict better times ahead.

“I feel that we are on a very slow upward trend and before any of us realizes it we’ll all be singing ‘Happy Days Are Here Again.’ It’s the nature of the cyclical beast,” said Jeff Solomon, chief executive officer of Globe Metal Recycling Services Inc.

“Since so many producers shut down high-cost capacity in the face of low prices, there will be a shortage of all types of materials by the third quarter of this year.”

Volumes at the scrap metal dealer headquartered in Montreal, Quebec, were down approximately 25 percent year-to-date in August, Solomon said. Prices, meanwhile, have recovered from the lows hit in the last quarter of 2008, but the prices of non-ferrous scrap metal are still around 25 to 40 percent off of their highs.

The market for non-ferrous scrap is hurting the bottom line at Sims Metal Management Ltd., the world’s largest publicly-traded metals recycler, with operations in North America, the United Kingdom, Continental Europe, New Zealand and Asia.

“Prices are coming back a little, but volumes are way down,” said Larry Snyder, executive vice president for non-ferrous metals, based at the Company’s Chicago offices. He said that he expects “slow improvement” throughout this year and into next year.

The metals recycler reduced spending and headcount to mitigate the impact of the global recession. “With pricing and demand for scrap improving, and subject to recovery in scrap generation, we believe Sims Metal Management is poised for renewed growth, success and shareholder value creation in fiscal 2010,” said Daniel Dienst, chief executive officer, in a statement following the release of its fiscal 2009 report.

“We have maintained a strong balance sheet through low gearing and we more than doubled cash flow from operations in the past fiscal year, providing us with the financial flexibility to further expand our unrivaled global footprint,” he added.

Credit is still a problem for some metal recyclers, said Bob Garino, director of commodities at the Institute of Scrap Recycling Industries Inc. in Washington D.C. The trade association represents nearly 1,600 companies with more than 7,000 facilities.

“If you are in the Midwest, for example, it is not that you can’t get scrap. Scrap is available,” Garino said. “But you are going to have to make sure that you can pay for it right away. Credit issues are still affecting how scrap is moving to the consumers.”

Prices in the non-ferrous market may also be ahead of fundamentals, Garino said. “There is probably a fairly good argument that we are going to see a pushback in commodities. I think the market is a little ahead of itself, based on fundamentals.”

A lot of the influence on prices in the scrap metal markets follows what is going on in China. If there is less scrap being shipped to China, prices will drop. “But I don’t see any of these metals testing the lows that we saw in the first quarter,” Garino said.

Inventories, meanwhile, are at an all time low and scrap shipments are increasing. “We are coming off such a low base that the idea is that we will build from these numbers. Whatever slack is closed by lower Chinese buying and consumption will be mitigated by an increase in what we are seeing in developed nations,” Garino said.

Aluminum inventories, for example, totaled 266,500 tons at the end of July, or 42.5 percent below inventories at the same time last year, according to the Metals Service Center Institute. The trade association, which represents the largest single group of metals purchasers in North America, reports aluminum stocks were equal to a 3-month supply.

“We are starting to see things begin to percolate, a sign of a restocking cycle that is characteristic of the first stages of recovery,” said John Mothersole, a senior economist who tracks the non-ferrous markets at IHS Global Insight Inc. in Washington D.C.

“I’m not going to say that it is anywhere near good. But, I get the sense that the conditions are improving. They are not great, they are not good, but they are better.”

While he expects prices in the non-ferrous scrap metals markets to improve, he said the markets have moved a bit ahead of fundamentals. “On a technical basis they are over bought, therefore are ripe for at least a temporary, modest pullback,” he said.

Mothersole said the base metal markets are a good leading indicator for the larger economy by about six months to a year. He said the prices in the market are counting on a V-shaped recovery, where the market drops fast and then returns quickly. But he expects the recovery to resemble more of a U-shaped, or possibly even a W profile.

“We have come off the floor fairly fast driven by Asia, but we are likely to see the strength of the rebound moderate a little bit over the next six to eight months,” he said.

The cash prices for aluminum, for example, breached $2,000 a metric ton in July on the London Metals Exchange. Since there continues to be an increase in visible inventories, according to research by IHS Global Insight, the prices appear to be driven largely by investor demand, which might suggest a modest pullback in pricing.

Copper prices also increased from around $5,000 a metric ton at the start of July to over $6,000 a metric ton in early August. The forecasting firm is predicting an average price of $5,602 a metric ton in the third quarter and $5,875 for the fourth quarter.