Subtraction Problem

For the past three years, demolition contractors have been able to count on a healthy return on the scrap metal pulled from job sites, whether steel beams, copper wiring or aluminum extrusions. Likewise, recyclers of mixed C&D materials have been able to count on a nice payoff for the metals yielded by their sorting lines and sorting systems.

The closing months of 2008, however, are bringing a major change to the calculations performed by demolition contractors, and mixed C&D recyclers are starting to see much less of a return on the metals they harvest.

A variety of wider economic factors—some of them global, some of them home-grown—have combined to quickly shift the metals commodity markets away from the insatiable demand scenarios that had been in place for much of this decade.

As noted in the previous issue of Construction & Demolition Recycling ("Summer Heat," Sept.-Oct., pg. 82), by late summer fundamental changes in the demand for iron and steel scrap were becoming apparent.

Part of the reason for those changes has been explained with the release of global steelmaking figures from the World Steel Association (Worldsteel), based in Brussels, Belgium.

For this September, Worldsteel has calculated that crude steel production for the 66 countries that report to it has fallen 3.2 percent compared to September 2007 figures.

The biggest reason for the drop-off lies with the world’s leading steel producer: China, which led the decline in steelmaking. Its crude steel production for September 2008 was 39.6 million metric tons, a decrease of 9.1 percent compared to September 2007.

Worldsteel (formerly known as the International Iron and Steel Institute or IISI) says global production in September of 2008 was 108.4 million metric tons, creating a year-to-date total of 1.036 billion metric tons. The year-to-date figure represents a 4.6 percent increase compared to the first three quarters of 2007.

But the September 2008 figure is signaling a new (downward) trend. It has slowed the world crude steel production moving annual total (MAT) growth rate to 4.7 percent, compared to 5.6 percent after August.

For September, steelmaking continued apace in many parts of the world other than China. Total crude steel production in North America was 10.9 million metric tons this September, roughly equivalent to September 2007.

In September 2008, the EU produced 17.4 million metric tons of steel, an increase of 0.9 percent compared to last year, and Russia kept churning out steel in September, producing 6.1 million metric tons, 7 percent more than in September 2007. Likewise, Brazil produced 3 million metric tons in September, an increase of 5 percent compared to the same month in 2007.

But October ferrous scrap buys and reports on capacity in North America demonstrate that the rest of the world has started following China’s lead, slowing down and shutting off steelmaking furnaces.

Figures maintained by the American Iron and Steel Institute, Washington, show that cuts in production have been rapid and sometimes extensive. For the week ending Oct. 11, domestic raw steel production checked in at slightly less than 1.9 million net tons, with a capability utilization rate of 78.3 percent.

That is a sharp decline from the same time last year, when production was 2.1 million tons and capability utilization was 88.5 percent. Production for the week ended Oct. 18 demonstrated an 11.5 percent decrease from the same period in 2007. The figure for that week was also down 3.8 percent from the prior week, while the capability utilization rate also continued to decline.

For scrap metal recyclers, the result has been a sudden lack of demand for their material, and when offers are made, they are at a much lower price than they were receiving in the summer.

Transaction pricing compiled by Management Science Associates Inc. (MSA) for its Raw Material Data Aggregation Service (RMDAS) shows buyers of some grades in October paid less than half of what they paid per ton in September.

Nationally, the average spot buyer of prompt ferrous scrap paid $261 per ton, down from the $564 per ton paid in the September buying period. No. 1 Heavy Melting Scrap (HMS) lost more than $100 per ton in value, dropping from $306 per ton in September to $205 in October.

Those falls came after similar declines in September. Prices peaked in July, when grades of scrap were trading at from $500 to $800 per ton.

"The word ‘unprecedented’ is sometimes overused, but in this case I think I’ll use it," says one scrap recycler in the Southeast.

Prices have moved upward for several years, but in particular in the first seven months of this year. "But it took just two months to make it fall to its knees," says the recycler. "We all expected a hard fall, but certainly not trouble selling the scrap."

But sales have been hard to come by for many recyclers. "It’s a panic—I think I’d use that word as well," says the recycler to describe a situation "when everyone is offering scrap and no one is buying it."

In the third week of October, he noted, Gerdau Ameristeel and another steel mill in his region had already announced that they would not be buying any scrap in November.

"Overseas, they are rescinding and not honoring orders," says a recycler in the Great Lakes region. "We’re moving a little [scrap] domestically, but the pricing is a little sick."

Based on late October activity (or the lack of it), one recycler anticipates that November pricing will be lower yet.

For the market to hit its bottom and then start moving back up it will probably take a series of steps or triggers, including:

For now, the market for scrap iron and steel has evaporated as suddenly and thoroughly as at any time in recent memory. Steel mill buyers are likely to wait at least another 30 days, one recycler predicts, stating, "No one wants to buy today what they can get tomorrow for less."

Metal commodity markets don’t always move in unison, but they do tend to travel in packs. For contractors or recyclers selling scrap metal it is unfortunate that copper, stainless steel and other metals are moving downhill along with scrap iron.

As with ferrous scrap, the prices paid for copper scrap have hit historic highs this decade, and demand from China has clearly been the reason.

But China’s post-Olympic economic slowdown has included less demand for and production of copper just as it has steel.

According to the International Copper Study Group, based in Lisbon, Portugal, the average price of copper on commodity markets fell 14 percent in just one week in mid-October. One reason: copper makers in July produced some 65,000 metric tons more copper than was used by factories and other buyers around the world, so inventories are building.

Transaction pricing maintained by the London Metal Exchange (LME) serves to demonstrate the rapid decline in the copper market. As of Oct. 20, copper had lost more than 50 percent of its value from the record-high peak it achieved in early July of 2008. While it took several years of steady, uphill climbing for copper to reach a price of more than $8,900 per metric ton, from mid-July to mid-October (a three-month span), copper has moved downward to less than $4,000 per metric ton in value.

Aluminum has not been as volatile this decade, but events in China could yet have an impact on the prices paid for aluminum at the scrap yard scale.

China’s largest aluminum maker, Chalco (Aluminum Corporation of China Ltd.), announced in October that it plans to cut its annual production by 18 percent, or some 720,000 tons. In a news release, the company says it sees weakening demand for its products.

Scrap recyclers have been confronted with a situation where they are paying a lot less for material and perhaps even turning away potential customers.

"The orders on the sell side are hard to come by; domestic [scrap] sales are weak," says a Midwestern nonferrous scrap recycler.

Some large scrap companies have instructed their buyers and facility managers to curtail buying activity. The Midwestern recycler says he is always reluctant to do so, but at the same time the unprecedented market conditions are forcing that decision.

"Sometimes I am saying ‘no’ to material," he comments. "If I don’t have the orders on the sell side, I can’t have piles of scrap lying on the floor losing value. You hate to do that; you’d rather be a steady buyer. But never in my life have I seen a downturn that was so dramatic or happened so quickly."

Demolition contractors and mixed C&D recyclers with scrap in inventory may need to decide whether it is an opportunity or a risk to hold onto materials and speculate on when the market will bounce back with upward-moving prices. C&DR