Future shock: the center of the recyclable commodities universe appears to have shifted to China

Recycling Today, April, 2004 by Brian Taylor

Throughout 2003 and into 2004, scrap recyclers have shipped out materials at lofty per-ton prices, particularly for ferrous scrap and copper-bearing scrap.

While the secondary commodity markets have always been cyclical, observers and trackers of market forces historically have looked to North American market fundamentals (particularly on the demand side) to figure out why prices are rising or falling.

This natural inclination to look first at North America seems to be coming to an end, as the demand that drove supplies down and prices up in 2003 and thus Far in 2004 has come from Asia in general and China in particular. The U.S. role in demand has been secondary at best, many market watchers believe.

The question to ask before making decisions based on future conditions is whether Asian market fundamentals have permanently or temporarily replaced North American market fundamentals as the key barometer of pricing.

THE WORLD'S METAL SHOP. During most of the 20th century, the U.S. could take pride in its leadership in the production of steel and other metals, often providing the basic materials needed not only for its own economic expansion, but also exporting to other global economies.

As the century reached its dosing three decades, however, that leadership position began meeting stiff competition from East Asia, first in the form of Japan and South Korea, and ultimately from the rapidly industrializing People's Republic of China.

With more than 1 billion people, China's conversion from an agrarian to a more industrial and information-centered economy is a major global event. It compares in some ways to the industrialization of the former Soviet Union and the rebuilding of Europe and Japan following World War II, while differing in many other respects.

Looking strictly at metals consumption and production, comparisons can certainly be made. The harsh Stalin five-year plans of the pre- and post-World War II era raised Russia's metals infrastructure from a second-tier one on the global scene to a global leader in mining, metals production and metals consumption.

Similarly, the Marshall Plan years in Western Europe after World War II and the decades following the war in Japan saw a from-the-ground-up rebuilding of major cities and national infrastructures, consuming huge amounts of metal while also seeing the creation of steelmaking complexes and smelters and foundries for other metals.

During various times in these rebuilding efforts, scrap and finished metals prices rose and fell to meet the needs of these growing economies. The metals industries in Japan and other nations ultimately reached a plateau fairly close to being in balance with the needs of their national economies.

In the case of China, with its 1 billion people, where that plateau might lie is a source of intense speculation. Questions that figure into the mix include determining how many of China's people may ultimately live in middle-class households that will own washers, driers, refrigerators, automobiles and other metals-intensive durable goods.

The growth demonstrated so far by China has been rapid on the steelmaking side. In just the past year alone, China's monthly steelmaking production has gone from 15 million tons (Feb. 2003) to 19.7 million tons (Feb. 2004). Its annual production of raw steel, according to figures from the U.S. Geological Survey, Reston, Va., has risen from 100 million metric tons in 1996 to 200 million metric tons in 2003.

The continued growth has been largely attributed as the force behind ferrous scrap prices, which have hit record-breaking highs in early 2004.

The alarming flow of scrap to China has caused some nations to impose restrictions on the outflow of scrap. (See "Tapping the Breaks," pg. 98 of this issue.)

South Korea and some former Soviet Republics have imposed such restrictions, while even in the U.S. some scrap consumers have banded together under the name the Emergency Steel Scrap Coalition.

Robert Stevens, the Coalition's founder, is the CEO of a Columbus, Ind., scrap consumer who says his company is paying $10,000 per day more for scrap and that these charges cannot be passed on to customers. He testified before Congress that such circumstances are part of the wider problems besetting the U.S. manufacturing sector, which has lost 2.8 million jobs in the past three years.

RED METAL FEVER. Similar patterns can be seen in the copper market, a material for which demand has escalated as China wires its nation for electricity and telecommunications; builds more electronic appliances for the world market; and also constructs office and apartment towers and industrial plants with copper and brass pipes, tubing and fixtures.

Between January and August of 2003, buyers of number two-scrap copper in the U.S. were paying between 60 and 70 cents perpound in the U.S., according to American Metal Market pricing.

But later in the year, as brokers representing smelters and foundries in China placed larger and larger orders, the strain on the market showed. By the fall of 2003, dealers from throughout the U.S. were reporting tight copper scrap supplies as demand from overseas buyers continued unabated.