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A Turn for the Worse

Features - Construction

The export market seemed to offer continuing opportunities for domestic scrap processors in early 2008, but has since suffered dramatically.

Dan Sandoval March 26, 2009

Newton’s third law of physics, "For every action, there is an equal and opposite reaction," could be applied to recent export markets for secondary commodities. Recyclers were tempted to think that China’s insatiable demand for metal, paper, plastics and the other commodities needed to fuel its growth spurt would never end. A number of U.S. recyclers eschewed domestic consumers, opting instead for the far more lucrative offshore trade during much of this decade.

While China was the major buyer of raw materials, other developing countries also helped propel export demand to unprecedented heights, including India, the Middle East, Malaysia and Vietnam.

PUTTING ON THE BRAKES

Whether ferrous or nonferrous metals, paper or plastics, the export market for recyclables stumbled during the past last quarter of 2008, completely halting what had previously been a red-hot market for secondary commodities. Much of this downturn can be attributed to the decline in demand from China. The country’s insatiable appetite for recovered materials, which helped propel scrap markets to unheard of levels, has seized up, causing a significant ripple effect throughout the world.

In late 2008, shippers with large loads destined for Chinese ports found out that their buyers, only too happy to snap up whatever was being shipped just a few months earlier, have now become scarce. Almost overnight, price and demand plummeted, with some sources reporting that prices declined by 70 percent to 80 percent, with some buyers refusing to honor earlier orders at any price. Other buyers, while not leaving the market altogether, renegotiated already set deals, seeking lower prices. As a result, containers stacked up in ports throughout Asia without any buyers.

According to several recyclers, the buyers who disappeared from the market were often long-time customers, with some U.S. recyclers saying they had established relationships with these buyers over a number of years.

ASSESSING THE FALLOUT

Some of the shippers who saw the biggest problems were the largest recycling firms. Schnitzer Steel, one of the largest ferrous scrap exporters from the West Coast, cited the write-offs that occurred during the final quarter of 2008 as the reason why it expected to post a loss for the quarter somewhere in the range of $60 million.

As shocking as that number may appear, the actual losses from canceled orders industry-wide could exceed the $1 billion mark. Robin Wiener, executive director for the Institute of Scrap Recycling Industries Inc. (ISRI), Washington, D.C., says there is no way to know how large the problem is, but she adds that the number is in the hundreds of millions, if not billions, of dollars.

This climate has created even greater trepidation among many recyclers, who have expressed concern that a deal that was already done could be subject to further scrutiny with possible claims being filed if a price wasn’t reduced by enough.

Granted, a number of shippers have taken advantage of the strong offshore market to ship material that stretched the definition of the contracted material. While these suspect shipments were routinely rejected in light of quality issues, the insinuation was that unless a new, far lower price was presented, other loads would be rejected.

Reflecting the almost total disappearance of exports during the fourth quarter of 2008, prices for many secondary commodities crumbled. Ferrous scrap, copper and practically all grades of recovered fiber saw prices fall by more than half, pushing many recycling firms into a difficult predicament.

According to some reports, recyclers have closed their doors in light of their heavy losses. Many exporters have opted to rein in their offshore shipments and have looked to change payment terms.

China may be the focal point of the rejection contagion that has created such stress in the export market. However, other countries have become hot spots for shipment problems. Consumers in India, a growing destination for scrap, also have been increasing their rejection frequency. This has created concerns on the part of some shippers, who are seeing fewer outlets for material.

Responding to the problems, ISRI contacted the U.S. Commerce Department, as well as a number of other agencies, to intercede on behalf of U.S. exporters. However, even with the influence of the Commerce Department, many recyclers noted that their orders to China, which appeared to be Ground Zero for the export debacle, became almost nonexistent. Many Chinese steel mills idled their furnaces or started working at reduced levels.

DOWN BUT NOT OUT

While U.S. steel producers enjoyed fairly healthy export markets throughout most of 2008, the import of finished steel has been declining. Despite a recent uptick in steel imports into the U.S. during the fall, many market observers say they feel

COMPOUNDING THE ISSUE

 China and other developing countries are expected to continue to play a key role in secondary commodity markets, but a number of concerns exist in the short term. One issue has been the collapse in freight rates. While on the surface this may appear to be a positive, the rates show the starkness of the problems on the export side. The Baltic Dry Index (BDI), which is the number issued daily by Baltic Exchange, London, that assesses the price of moving cargo via dry bulk carriers by sea declined sharply in late 2008.

The BDI declined by 90 percent from May 2007 to the end of 2008. A sharply lower rate would seem to be a great advantage to shippers, but, the decline tracks the overall slide in demand for vessels, which ultimately means fewer orders are being made.

While the BDI declined by nearly 95 percent in 2008 as December came to an end the index showed some modest rallying, reflecting a possible renewal in export shipments. While the timeframe for the rally is too short to say that export numbers will improve, early signs indicate the worst in export trends has already occurred.

the overall trend is toward greater steel exports.

Recent figures find that while finished steel imports from China jumped to a record high and imports from Japan also increased, imports from other large steel producing countries to the U.S. have been declining. Steel imports from South Korea, Germany and India all posted sharp declines for the most recently reported month.

Mike Locker, with Locker Associates, a consulting firm based in New York City, says that despite the tumultuous market toward the end of 2008, overall finished steel exports will end up greater than 2007’s numbers. The weaker U.S. dollar during the first half of 2008 helped to boost exports (as well as to reduce imports).

While the Chinese market will continue to play the dominant role in the export market, the next several quarters could be challenging. After several years of strong growth, the steel industry has been struggling with acute declines in price. According to one source, of the 71 major steel companies in China, 42 posted losses for October 2008. The situation could continue, despite the Chinese government unveiling a significant stimulus package which it hopes will invigorate the economy and spur new demand.

Nonferrous metals also could see significant challenges during 2009. China will likely continue to adjust its copper purchases downward, leaving many U.S. copper scrap exporters scrambling to find end markets for the material. As a result, copper prices are forecast to be, on average, around $1.80 per pound in 2009, a sharp drop from earlier expectations.

Supporting the negative sentiment driven by shaky short-term export markets, a recent Reuters/Jefferies CRB Index of 19 raw materials, including some base metals such as copper, shows the biggest annual drop since its debut in 1956 after plunging 56 percent from a record high in July.

In one report, analysts from Australia-based Macquarie Group Ltd. led by Jim Lennon, say, "The collapse in demand in the [fourth quarter of 2008] has been easily the largest anyone in all the industries we cover can recall, and we speak to some old people." C&DR

The author is senior and Internet editor for C&DR and can be contacted at dsandoval@gie.net.

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