The stain on stainless

Features - Scrap Metals Report

A global oversupply of stainless metals in the scrap market is a result of many factors.

November 9, 2015
Curt Harler

Industry experts, including consultants and journalists, were caught way off base in their year-ago outlook for stainless steel. At the beginning of 2015, most projections said nickel prices would be somewhere between $17,000 and $20,000 on the London Metal Exchange (LME). As summer broke into fall, nickel was hovering a touch below $10,000, about $4.40 a pound.

Nickel stocks on the LME are up at 454,000 metric tons. Supply is up, price is down.

Not helping the situation is the fact that 75 percent of stainless steel is iron and the iron market is down, too. As a result, stainless scrap is barely flowing.

Meanwhile, China has become the dragon in the market, producing more than 50 percent of the world’s stainless … yet using little offshore scrap in its melt.

“It is not a normal market,” says Arnold Fish, founder of Lake Shore Metal Recycling, Skokie, Illinois. He has been buying and selling scrap metal, both domestically and internationally, for more than 35 years. “There’s a shortage of scrap. Stuff is not coming in as it ordinarily would. It’s hard to get an appointment.”

“We’ve had six months of declining steel prices,” says Randy Castriota, president of Castriota Metals, Pittsburgh. “I’m an optimist, but I’m also a realist.”

He says he sees little movement for stainless. “It is very bad now,” Castriota says. “Ferrous and nonferrous markets both are going down. There is no demand.”

Fish notes that a typical stainless steel cycle—which would see a solid market from August into the fall, dropping down around Thanksgiving, rebounding in January and being strong in April and May—may be a thing of the past.

Fish blames speculator concern over currency, Greece, oil prices and other factors, which should be irrelevant to stainless steel scrap movement for the dislocation in the stainless market. And he says he sees the same thing with markets from aluminum to zinc.

Jim Wilkoff, president of Wilkoff & Sons Metals, Cleveland, says the current situation is not due to business cycles but to an oversupply. “More nickel will be consumed in 2015 than in 2014, but it won’t feel that way,” he explains. “The mining companies got ahead of themselves.” He notes that expansion at mines has stopped but no closures have occurred yet.

“Mining companies got into trouble assuming China would keep needing raw material,” he says.

Others agree. “Until LME stocks are reduced, China reduces exports, and domestic mill orders increase, you will not have any change in scrap,” says Barry Hunter, principal in Hunter Alloys, Boonton Township, New Jersey.

“Manufacturing in this country is stressed,” Hunter notes. Automotive is doing okay, but the auto business uses comparatively little stainless. “Every other sector is reduced,” he continues, “and obsolete scrap is not attractive.”

“The flow of scrap is very poor—and not just stainless but all the nickel alloys,” Wilkoff agrees.

One scrap dealer noted a situation where a competitor was sitting on 1,000 cars and turned down an offer of $10 for them. Today, the dealer says, he’s lucky to get $5.
 

The China factor

China’s dominance of the market was not the case in the fairly recent past. It went from being a bit player to producing something over 50 percent of the world’s stainless supply. And the country continues to turn out stainless.

“They have flooded the market,” says Hunter. As a broker, he has watched the change from the stainless industry being centered in the U.S.; scattered Asian countries like Korea, Taiwan, Japan and India; and Europe. Today’s market has the Chinese dominating everything.

The two largest mills in the U.S. and the two largest in Europe are owned by the same companies so those two markets are one and the same.

Wilkoff is reluctant to blame everything on China. He says part of the oversupply is due to a miscalculation by European stainless producers back around the year 2000. The Europeans saw demand perking up in China and knew it takes a lot of sophistication to produce stainless … industrial sophistication the Europeans believed the Chinese lacked. They figured it would take 25 years for the Chinese to get up to speed with stainless steel so the Europeans expanded their base to meet the anticipated Chinese demand. Unfortunately for them, the Chinese built out in five years and met most of their own demand, leaving the Europeans overbuilt, he explains.

“China is a major market. The U.S. is now a secondary market,” Wilkoff says. With China producing the majority of the stainless, Europe, the United States and Japan together now represent perhaps 40 percent of the world market.

So heavy is the Chinese market that the European Union has put sanctions on Chinese stainless, saying they are flooding the market. The United States is starting to look at similar protective measures.

Meantime, China—whose heavy demand for stainless and other metals provided a solid base for the market —simply stopped buying. “When they stopped, it drove the price of metals down,” Castriota says.

The Chinese not only have stopped importing stainless and aluminum scrap, notes Castriota, but they have closed some of their homeland manufacturing sites. “China, which guaranteed lifetime employment, is laying off people. It is a house of cards built to support their yuan,” he says.

That may point to an internal glut of stainless and other metals in China’s domestic market.

Wilkoff notes that the Chinese market is too recent to have major internal scrap generation. “Their economy is too young,” he says. Their auto industry, for example, is just 10 years old. Not a lot of obsolete material is coming from a market that recent. He makes the same argument for China’s consumer goods sector, demolition business and other scrap-generating areas.

“If China reduces exports, that’s a game-changer,” Hunter says, adding,

“If the price of nickel goes up, that’s a game-changer.”

However, neither of those factors will do much to boost domestic manufacturing here in the United States—and it is manufacturing that generates the majority of stainless for the domestic market.

While Hunter concedes that both the automotive and the housing markets are doing better, Castriota points to a devastating fact: neither is a big consumer of stainless. Markets like drums and rotors are not going to support the entire stainless sector. And the 304 and 316s are not thriving. In early fall, the former was trading around $7,500 and the latter around $11,200.

“You have to have manufacturing— you need to produce a product that will generate scrap,” Hunter says.

On top of that, if we are going to eat down the surplus it would be great if manufacturers would use more stainless and other ferrous metals in their products. It is a tough fact that the trend is in the opposite direction. Ford’s 2017 F-150 will have 800 more pounds of aluminum than earlier editions.

The military-grade aluminum will allow Ford to reduce the truck’s weight by 350 pounds. From a fuel economy point of view, it is a great move. From the steel industry’s view, it is not. This is not to single-out the F-150 as just about every automaker from Audi to BMW to Volkswagen is doing all it can to lightweight vehicles to meet fuel standards.

It is the same sad scene in consumer goods and housing. Castriota notes that extensive use of 400-series stainless in appliances like dishwashers is history. “They’re plastic, mostly,” he says. “They are not using steel.” Even copper, as specialized as it is, is being replaced by nonmetallic. CPVC (chlorinated polyvinyl chloride) and PEX (cross-linked polyethylene) tubing are making inroads in plumbing.

Stainless enjoys some market security in the specialty sector. Yet what scrap is generated in the high-temp alloys has been removed from the general market as producers work with a handful of recyclers in a closed-loop system.
 

Looking ahead

The need to keep stocks current and moving is echoed again and again.

“My gut feeling is that we will see stabilization in the markets very shortly,” Wilkoff says. However, the outlook for a bounce back in prices is much more cloudy. “Now you’re dealing with world economies,” he says.

“It will change,” Wilkoff assures. “History tells us about supply and demand.” The challenge, then, is to survive the cycle.

“If you want to make money, you have to make your money on the margin,” Hunter says.

“Sell into the market,” Fish agrees. “When you have a truckload of material, sell it. Hopefully, you can make a profit on new material.”

“I’m selling everything I have when I get it,” Castriota says. “I’m selling and trying to make it on the margin.” It is not that easy. “Our spreads are thin right now,” he says. While the percentages are the same, those percentages are of smaller numbers, so the dollars are not as big.

Even surviving on the margin percentage can be hard to do in today’s market. China imports limited stainless scrap from the U.S. China does use nickel pig iron. However, overall it uses only about 25 to 30 percent scrap in its product while the European and domestic markets use closer to 70 percent.

Fish says most of the domestic indicators are good, citing respectable numbers from auto sales, employment and real estate. “All the base products are good—except the LME market does not see that,” he says.

At the root of the problem, Fish finds the speculation on the LME. And only a major, fundamental market change will change that soon. The big unanswered question becomes whether the Chinese will have to purchase scrap on the international market. Few observers see the Chinese jumping in with both feet any time soon. Yet the Chinese have been known to surprise the recycling world with major demand surges.

Castriota is not so sure. He says his big hope for improvement in stainless and the other metals is a return of manufacturing to the United States. “It would help if Ford would build a plant around here,” he says. He knows that there are two mega-factors that argue against a major upsurge in the domestic manufacturing sector: U.S. tax laws, which have chased all sorts of companies offshore and cheap labor overseas.

“There is always hope for a turn-around,” Hunter says. However, he sees little likelihood of that happening between now and the New Year or even by spring. “Today’s market is the current reality,” Hunter says. “Will there be change? In five years, we’ll know.”

Fish, likewise, is bewildered by today’s situation. “The market will improve when the exact opposite of what caused it to go down happens,” he says. “There is no rhyme or reason to what is going on. You don’t have normal business cycles because of what is happening on the LME.”

Sooner or later, normal business cycles should reassert themselves and allow the market to adjust. Then the stain on stainless scrap will be blotted out. Few, if any, though, see that transition coming any time soon. The good news in that outlook might be that predictions have been wrong in the past.


 

The author is a contributing editor to Construction & Demolition Recycling. He can be reached at curt@curtharler.com.