Home News C&D; World 2015: End-market disconnect

A disconnect between the U.S. economy and scrap metal prices appears to exist, and Joe Pickard, chief economist and director of commodities for the Institute of Scrap Recycling Industries Inc. (ISRI), Washington, D.C., sought to explain why to attendees of C&D World in Nashville, Tennessee, in late March. 

 

During a session on end markets, Pickard told attendees that the scrap recycling industry is resilient but has struggled in recent years. “There has been a real disconnect between some of the macroeconomic indicators for the economy overall and what has been going on in our industry,” he said.

 

During his March 30 presentation, Pickard said nonferrous prices have been down for the year, with nickel and tin having had the worse price performances. Nickel is at prices we haven’t seen since 2009, he said. “We are also seeing weakness across the spectrum.” 

 

Copper prices have recently bounced back, but copper prices have been pretty clearly on a downward trajectory. There has been a slight uptick in the last 4-6 weeks, but the downward trend is taking a toll, not only on bottom lines but also on scrap availability, Pickard pointed out. 

 

There have been decreases in prices on the ferrous scrap side as well, with February benchmark prices for ferrous scrap down $100 or more per ton. Pickard said it marked the largest monthly decline in ferrous prices since 2008.

 

Several factors led to the decline in ferrous prices. Falling iron ore prices, excess global steel production, particularly in China, are putting pressure on finished steel prices, and a number of transportation issues in the United States have created what Pickard described as “the perfect storm.” 

 

Market conditions for scrap are the worst many metals recyclers have seen since the recession of 2008-2009. Meanwhile, Pickard pointed out, payrolls have increased with 200,000 jobs being created per month, gross domestic product (GDP) continuing to grow for 5 consecutive years and inflation and federal funds rates remaining low. 

 

Why the disconnect between the economy and scrap metals prices? Pickard said part of the reason is that the metals recycling industry is still a commodities-based business that is largely out of recyclers’ control. Not only are prices low, but increased volatility is causing problems for the industry. 

 

Domestic scrap processing capacity has seen a large increase over the last two decades. For instance, the number of auto shredders over the past 20 years has grown from 170 to 320. This has created heightened competition for the feedstock. In addition, the manufacturing sector in the United States has struggled. 

 

Adding to the challenges for recyclers has been the logistical problems of driver and container shortages as well as problems at West Coast ports. The result is a transportation sector that has been a real nightmare, said Pickard.

 

A shifting regulatory framework also has created huge compliance costs. Pressure on the supply side is causing more competition for available feedstock. “All of this is putting pressure on scrap industry profit margins,” said Pickard.

 

“Certainly, our industry remains resilient and I think there’s grounds for optimism in the medium to longer term. But in the shorter term we are going to see more challenging conditions,” Pickard said.

 

For the residential and nonresidential construction sector trends have been mixed. As a result, the steel industry has seen a sharp decrease in capacity utilization rates. Pickard also discussed how declining oil prices and a strong U.S. dollar means more steel is being imported from outside North America, reducing domestic steel’s share. Steel production has declined 5 percent year-to-date from the same time last year and a lower capacity utilization rate at steel mills has led to layoffs and idled capacity, added Pickard.

 

Ferrous scrap purchases dropped by about 4 million metric tons to 73 million metric tons generated for domestic and export consumption in 2014. 

 

“It was really on the export side that things took a toll for the worse. The export side has become extremely important to the scrap industry,” noted Pickard. He explained that in 2000 only 18 percent of ferrous scrap was exported, however, by 2010 38 percent of scrap was being exported. “The domestic market is still our largest customer,” he added, although the trend is toward increasing export sales.

 

While ferrous scrap exports have been growing, more recently exports are experiencing weaker demand due to a decline in primary steel prices, he continued. As well, Chinese generation of scrap is on the rise. This could supplant ferrous scrap that previously was exported from the United States to China.

 

Reflecting this switch, ferrous scrap exports to China, excluding stainless and allied steel scrap, dropped 18 percent or 3 million tons in 2014 from the previous year. Pickard called it a “huge downward trend” on Chinese ferrous scrap exports from 3.7 million in 2011 to only 500,000 tons in 2014. He added that Turkey also has been steadily reducing its import of U.S.-generated ferrous scrap. 

 

Pickard emphasized a need to develop new markets for scrap material. He noted that China has been the most important overseas market, especially for nonferrous, where 60-70 percent of nonferrous scrap exports from the United States go. 

 

“It hasn’t been entirely bad news in terms of global demand for scrap,” Pickard concluded. “We have seen some growth markets in recent years.” Canada, Mexico, South East Asia and the Middle East have taken up some of the slack in Chinese demand. But, said Pickard, “not enough to make up the shortfall.”

 

Pickard said the economy is expected to grow in India, Mexico and Brazil, while Chinese growth is expected to slow to 7 percent or less in 2015.

 

Wood is another end market that affects construction and demolition (C&D) recyclers, but it is less dependent on the global economy and driven more by regional end markets and regulations surrounding its use in fuel applications. 

 

ReEnergy Holdings LLC, based in Latham, New York, processes C&D wood at its C&D recycling facilities for the company’s fuel facilities in the Northeast and North Carolina. Michael Buckley, ReEnergy’s regional director of asset management, described the company’s footprint and the issues it faces in the states it operates.

 

ReEnergy has both a renewable energy sector and waste services sector. The company’s eight biomass facilities generate 300 megawatts of capacity; and its C&D recycling facilities in Maine, Massachusetts and New Hampshire can process 1 million tons of material per year and processed 700,000 tons in 2014. 

 

Connecticut, Maine and New York all have specifications for fuel that include requirements for the amount of chromated copper arsenate (CCA) treated wood, plastic, non-wood, noncombustible and fines. Connecticut and New York regulate the wood through a chemical analysis, while Maine requires a physical characterization of CCA wood.

 

Connecticut, Maine and New York all allow some level of non-wood component in the fuel. In New York, non-wood, including plastic, can only make up 0.5 percent of the blend. Connecticut and Maine manage the percentage of fines, both requiring the fuel be made up of less than 10 percent 1/4-inch minus fines. Buckley described Connecticut as tougher than other states because it requires a weekly inspection on all suppliers, while New York requires monthly tests on suppliers to make sure the fuel meets the specifications. 

 

Buckley explained that in New York he sends out samples from suppliers, and if it passes the facility receives Renewable Energy Credits (RECs). “Quality control and quality insurance is very important in New York,” Buckley said. 

 

Buckley has been procuring wood for ReEnergy since 2013. Chemical analysis is also conducted in three areas: arsenic, lead and chlorine. 

 

“Arsenic is a really tough mark to hit,” Buckley said. CCA removal programs of our suppliers have to be steady. Connecticut is the strictest in its requirements for arsenic. Given that arsenic is a natural element in natural harvested wood, Buckley said it is a difficult spec to hit. Maine, on the other hand, uses a blended fuel so the biomass facility can use both harvested wood and C&D wood and average it out to eliminate the percentage of arsenic. Other states don’t allow blending and require the types of wood to be burned separately.

 

When Buckley first began procuring wood for ReEnergy he said he did weekly testing on all the suppliers’ material as there was “a lot riding on the results.” He said he tested for arsenic and lead on a weekly basis until he was comfortable with the outcomes. Following the tests, ReEnergy developed an educational document on what to look for in the wood. ReEnergy would also provide suppliers with the test results. 

 

“Typically, suppliers will be more than happy to accommodate,” Buckley said, noting there aren’t many markets available. “Our suppliers are more than happy to work with us,” he said. 

 

C&D World was March 20-31 at the Music City Center in Nashville.