Meltdown of non-ferrous metal market
Slow industrial growth and credit crisis are contributing factors
by Brian R. Hook

Fears of a prolonged recession, thanks to the world-wide credit crisis, is putting pressure on prices of non-ferrous metals, hurting scrap metal processing companies.

“We have witnessed a meltdown of pricing in the non-ferrous sector,” said Jeff Solomon, chief executive of Montreal-based Globe Metal Recycling Services, Inc.

“Low prices have a devastating effect on recyclers. With these low prices there is virtually no margin left on a wide range of (non-ferrous) items and these items will become part of growing inventories of unsold materials accumulating in scrap yards.”     

To counter the slowdown in demand, Solomon said the company is working hard to increase volumes and market share at Globe Metal, which purchases all grades of non-ferrous metals and processes 10,000 to 12,000 tons of non-ferrous scrap per year.

York, Pennsylvania-based Consolidated Scrap Resource, Inc. is also trying to grow its non-ferrous business in a “smart and controlled way”, said Ben Abrams, executive vice president and chief financial officer. The Company buys all types of non-ferrous metals and operates six facilities located throughout central Pennsylvania.

“The real challenge has been to operate when prices are constantly falling, as they have been for the last two months,” Abrams said. “But as prices stabilize, we will pay less for our raw material, so we will start to see some consistency in our margins.”

The price paid by Consolidated Scrap for scrap copper in late October was down 60 percent from June, Abrams said. Aluminum was down close to 70 percent.

Abrams blames lower demand on expectations for slower growth, adding that there has been an absence of buyers, both from domestic and international companies. He does not expect to see any improvements in demand until manufacturing picks up.

“Our business is no different than other manufacturing businesses. Tighter credit, as we have right now, hurts demand for all types of production,” Abrams said.

Bob Garino, director of commodities at the Institute of Scrap Recycling Industries, Inc. in Washington D.C., characterizes the market for non-ferrous metals as unbalanced. While there is plenty of supply due to lower industrial production, he said there is very little demand. “We are not seeing any buying to speak of,” he said.

Garino blames slower demand on a slowing economy, adding that demand started to slow this summer, even though prices held steady. “We sensed slower economic activity months ago. It really seemed to start dropping off in the second quarter,” he said.

Garino notes that the Commodity Research Bureau (CRB) Metals Index in late October was down 30 percent from its April peak. The CRB Index consists of copper scrap, lead scrap, steel scrap, and other metals. The London Metal Exchange (LME), an index of LME traded metals, peaked in March and was down 52 percent in October.

Industrial production feeds into the total supply chain, Garino said, adding that the processers, therefore, are not looking for metals and that slows down everything coming into the metal scrap yards as well. “It’s all down across the board,” Garino said.

“The economy is weak and I don’t think you can assume that it is going to correct anytime soon,” Garino said. He said it could be mid-2009 before a recovery.

Price forecasts this year and next have been aggressively scaled back due to anticipated surpluses. Garino said some forecasts project copper prices will average below $2 next year, noting that copper is often used as a proxy for non-ferrous metals.

“The change has been tremendous and profound,” said John Mothersole, senior economist at IHS Global Insight, Inc. in Washington D.C., when referring to the market for non-ferrous metals. “I have never seen a market turn as quickly or as strongly.”

Mothersole said deleveraging has now engulfed commodities across the board. “What we’ve seen in financial markets is clearly spilling over into commodities and that is not surprising since a lot of financial capital has been at play in commodities,” he said.

The money that went into commodities is coming out of the market quickly and is contributing to the downward momentum in commodities, he said. “I think the market is pricing in a sharp downward revision in consumption growth for next year,” he said.

Mothersole said the market for non-ferrous metals may be near a trough. “But this market psychology is geared to accept any bad news,” he said. “Just like we overshot on the upside the last couple of years, we are likely to undershoot on the downside.”

Scrap metal recyclers have inventory that was purchased at much higher prices, Mothersole said, therefore it is going to be a long time before the recyclers realize the purchase price. He said recyclers are going to take a loss on a lot of their material.

Mothersole points to nickel as a market that has seen a huge correction. Prices on the LME peaked at $53,000 a metric ton. Nickel closed in October below $10,000. Aluminum peaked at $3,200 a metric ton but closed at $2,000 in October. Copper hit an all time high of $8,900 a metric ton, but fell below $4,000 a metric ton in late October.

“Amazing” and “extraordinary” is how Mothersole characterizes the price movements, “I think it is symbolic of the negative psychology that is pervading the market,” he said.

Scrap metal recyclers are going to be under financial stress, which may lead to consolidation in the industry, Mothersole said. “Scrap yards and secondary processors are really going to be under pressure given the high prices that they have been paying.”

To make matters worse, the credit crisis roiling the markets has reduced expectations for consumption growth next year. “I think with the kind of psychology that is hanging over the market right now we are very pessimistic,” Mothersole said.

When will the market for non-ferrous metals correct itself? “My strong suspicion is that markets are going to undershoot and that there is going to be a snap back at some point,” he said. “It all depends on when buyers start to step back into the market.”