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NonFerrous scrap outlook shining brighter

With demand for key metals exceeding supply, recyclers can see the light at the end of the tunnel

The turbulent nature of commodity markets is a given, but metal recyclers have no control over the vagaries of scrap steel, copper, aluminum and other recycled metal prices. Recyclers must take what the market will bear, and with commodities across the board dropping since 2011 as demand for scrap metal in key markets like China declines, that has made it tough for the industry. Thankfully, however, there is light at the end of what must feel like a long, dark tunnel. Year-to-date, nonferrous scrap metal prices have risen, particularly zinc, whose price is on a tear due to demand for the anti-corrosive metal exceeding mined supply. The same supply-demand scenario holds for copper, another key nonferrous scrap metal. According to data from the Lisbon-based International Copper Study Group, demand for refined copper is outstripping the supply of prime and secondary production. The price run-ups are great news for scrappers, who know that the higher per-unit value of nonferrous versus ferrous scrap means that increases in nonferrous prices can quickly lead to higher revenues.

To get a more nuanced view of current trends in the nonferrous scrap market, Recycling Product News reached out to Joe Pickard, the Institute of Scrap Recycling Industries’ chief economist and director of commodities, who kindly agreed to answer our questions from his office in Washington, DC. An edited version of our telephone interview appears below.

RPN: Can you place nonferrous in the context of the whole North American recycling market? I know it’s a fairly small percentage, but accounts for a big chunk of earnings for the industry.

JP: In ISRI’s 2016 Scrap Yearbook, which actually just came out, we talked about the fact that nonferrous metals are such a higher per-unit item than ferrous. If you look at ferrous scrap, which, say it’s trading at $200 or $300 per ton, copper scrap can be trading anywhere from $4,000 to $5,000 a ton. So you’re right, in volume terms, nonferrous is much smaller than the ferrous side. Ferrous and recovered paper are the two largest scrap commodities by volume that we process. But because of its higher per-unit value, we estimate that of total scrap recycling earnings in the U.S., more than half comes from just the nonferrous metals. So, for 2015, I think the estimate is that we processed about 8 million metric tons of nonferrous scrap here in the U.S. But that 8 million tons was worth more than $30 billion, as opposed to the 60 or 70 million tons of ferrous scrap that we processed, which is not worth nearly as much on a per-unit basis.

RPN: So as nonferrous prices go up, that makes a big impact on revenues for most recyclers.

JP: Yes, absolutely, and vice versa. When prices are falling, it has a disproportionately large impact, and we’ve seen, especially on the copper side, a challenging pricing environment recently.

RPN: Looking at the London Metals Exchange (LME) chart of nonferrous metals, year-to-date it looks pretty positive – all of the nonferrous metals are up. We’re talking about copper, aluminum, nickel, lead and zinc. Zinc seems to be kind of the ‘darling’ right now of nonferrous. The LME chart shows it’s up 42 percent, and I know that zinc is also the best performing mined metal of 2016. Can you comment on the zinc price run-up?

JP: It’s been interesting in that lead and zinc tend to get mined together, so they are often called sister metals, and their prices tend to move together. But that certainly hasn’t been the case in the last year or so where zinc really has taken off and lead hasn’t done much at all. Eventually, it starts to get back to market fundamentals. In the global zinc market, you’re seeing demand for zinc exceed what’s being mined and supplied in the marketplace. So you’ve got a global zinc supply deficit, and when demand exceeds supply, all other things being equal, prices tend to go up. Now, that can be exacerbated in the short term when commodity investors see these patterns. They can also pump money into these markets and ‘exaggerate’ the gains and losses, depending on what investor sentiment is doing with respect to any metal. But for the zinc story, and for tin and nickel as well, a big part of it is concern about supply being able to keep up with demand.

RPN: As you say, there’s usually a premium between lead and zinc. It’s greater than normal right now because of the zinc price rise. Do you see that narrowing at all?

JP: Lead supply is the mirror opposite of zinc, where lead supplies are more than adequate to keep up with demand so far this year. I think that’s why we’ve seen most analysts reporting slight lead market surpluses. That’s part of the reason why lead prices haven’t taken off the same way zinc prices have.

I don’t think that lead price performance has done much really to impact the lead scrap recyclers’ bottom lines. From the processor’s perspective, lead-acid batteries, especially from cars, are a huge part of the supply chain for lead scrap, and sometimes they’ll take the lead out of those batteries and process it. They’ll sell the whole battery after it’s been drained, either to domestic consumers or for export. I think because so much lead scrap comes from car batteries, our industry tends to look at car sales as a pretty good indicator of supply and demand for new batteries. Car sales have started to slow a little bit, even though 2016 has still been a good year overall for light vehicle sales and for battery demand.

RPN: Aluminum prices have risen 10 percent, and aluminum closing stocks at LME warehouses have dropped. Why are aluminum stocks dropping?

JP: The LME has registered warehouses throughout the world. On the aluminum side, two of the biggest ones are in Detroit, and there’s a very big one in the Netherlands as well. With very low interest rates that we’ve had the last couple of years and low warehouse rents, financial groups purchased a lot of aluminum and kept them in warehouses because they could roll over their contracts and actually make money keeping that aluminum out of the marketplace.

RPN: And then releasing it when the price goes up?

JP: Right. But what’s happened is that the LME changed some of their warehouse rules in terms of how long consumers can be kept waiting for material to come out of the warehouses and so we’ve seen a lot of aluminum stock, which had really built up, coming out of the LME warehouses and into the physical marketplace.

And so that influx of aluminum supply has weighed on those physical market premiums. When you’ve got more than enough aluminum floating around in the physical marketplace, that’s going to weigh on the premium that a consumer is willing to pay.

RPN: But the price rose 10 percent instead of falling, so the demand must still be robust.

JP: True. Aluminum is one of the brighter nonferrous metals in terms of demand prospects going forward, because demand for aluminum has been strong, whether it’s from the transportation sector or interest in lightweighting or moving towards alternate materials to steel.

RPN: The refined copper market is in deficit, but when you look at mining, the supply of copper from mines is exceeding demand, so you’ve got a surplus of mined metal. And that’s pushing down the price. What’s happening with the scrap copper market?

JP: The latest figures from the Copper Study Group, which is the data that ISRI uses, show that demand for refined copper has exceeded the supply of copper – both copper that comes out of mines and copper that comes from secondary production (obsolete and prime scrap).

So, it’s kind of a topsy-turvy relationship right now, in that you would think that if the global balance of copper is pretty tight, it should lead to rising prices. But that hasn’t been the case this year. I think a lot of that goes towards future expectations for Chinese demand for copper.

Copper demand in China is very closely tied to their infrastructure investment, their construction and how much they’re spending domestically. There’s been real concerns about a slowdown in Chinese growth and potential stockpiling of copper in China. Because, even though Chinese imports of refined copper have been very strong, there is concern about whether that copper is actually getting used to produce new products or whether people are stockpiling that copper because prices are attractive. I think that has kind of weighed on the market a little bit.

RPN: Turning to U.S. nonferrous scrap exports, I noticed that exports of copper and other nonferrous metals have dropped quite a bit since 2011. Is that all due to the slowdown in China?

JP: Pretty much. That’s almost entirely China. And the substitution within China, like with copper, when primary prices drop, there’s more incentive for consumers to use primary as opposed to scrap. That’s what’s going on in China, especially on the copper side where they’re importing a lot more ores and concentrates, as well as cathodes as a raw material input in place of scrap.

RPN: But some export markets are up by quite a bit, so you have, for example, Malaysia and Hong Kong more than doubling their imports from the U.S. And there’s been a huge increase in copper exports to Vietnam, as well as Peru and Malaysia. Are U.S. scrap dealers overly dependent on China? What can they do to diversify into these growing markets?

JP: I think they certainly did become overly dependent on China. That was what the market dictated. China just had a voracious appetite for all scrap commodities, nonferrous included, so that’s who was buying the material. There were days in 2008 when China would buy all the copper and aluminum scrap that we could put into a container.

So I think some scrappers really do need to explore other markets. A lot of people looked at rising labour costs within China, potentially leading to some of their manufacturing migrating to neighbours within southeast Asia or other countries where labour costs are relatively attractive, like in Mexico or South America. Those are some of the markets that our guys are really looking at closely because they do present growth opportunities, particularly right now in South Asia. If you look at India, but not just India, also Pakistan and Bangladesh, those are countries where scrap metal demand is really increasing.

RPN: I read an article recently, with one nonferrous scrap dealer saying his margins are better because there’s less competition right now, with a lot of companies having left the business. Do you agree this is becoming a trend?

JP: I think for most scrap recyclers, profit margins are still very tight. There probably are some companies that are going to start to benefit, because we have seen consolidation within the industry. For example, Sims Metal Management, one of the largest recycling companies, has been divesting some of its assets in the United States, recently selling some of its plants in the Midwest to Steel Dynamics, which is a large-scale producer. We’ve seen other companies cut back on their processing, and in some cases close their doors. So there has certainly been consolidation. RPN