IN DEMAND

Steel and scrap markets have sustained their strength for three years, but anticipation of a sudden drop lingers.

The success of global scrap markets has not been a secret for the past few years. Mainstream media outlets (or mainstream business media outlets, in any event) have reported on escalating metals prices and some of the causes and effects.

Whether reporting on the high cost of basic materials or the surge in metals thievery worldwide, scrap metal has gained attention.

While steel—relatively low in value compared to copper—may not be targeted by thieves as much as the red metals, it is nonetheless a hot commodity enjoying boom times.

BUILDING BOOM

A correlation has been soundly established, in many minds, between ferrous scrap pricing and the melting capacity rate at steel mills, as well as the demand for mill products. In short, as goes the steel industry, so goes the ferrous scrap industry.

Production and pricing figures from the past three years seem to back up that correlation, as the global steel industry has raced to keep up with demand from many different corners.

Geographically, Asia (and China in particular) is the poster child for the resurgent steel industry. The economic awakening of China has triggered a building boom—the building of everything including highways and bridges, office towers, apartment buildings, factories, retail centers, rail networks. If one can think of a steel-intensive building project, chances are there are several such projects underway in any given Chinese city.

The nation's steel production numbers are staggering. According to the International Iron and Steel Institute (IISI), China produced more than 420 million metric tons of steel in 2006. That compares to production of about 100 million tons in 1996, according to IISI figures.

Starting from a base of 100 million tons, China's production has quadrupled in just 11 years—an amount of time that used to be considered fairly short in national economic development terms. (See sidebar "China Calling," p. 11.)

An initial observation would be that if a nation is quadrupling its steel production, it must be flooding the market with exports. But figures do not necessarily point to that conclusion.

Even the export-heavy Chinese economy is one that is not directly exporting a high percentage of its steel. Some of its steel is made into products that are shipped to North America and other steel-producing nations.

But the balance of China's steel is going into its booming infrastructure and building sectors; into new automotive and vehicle production; and into the making of appliances and electronic devices that also serve the nation's growing middle class.

China's mill buyers, even those representing basic oxygen steelmakers who depend on less scrap, have been buying heavily from other nations to feed their furnaces. With so much of China's steel going into construction applications, this represents an end use that does not yield quick turnaround times from new production to obsolescence (scrap).

Thus, as long as China continues to produce large amounts of structural steel for long-term applications, it is likely to have a scrap deficit, many observers believe.

Domestically, a subdued housing market may be the first thought that comes to mind regarding the construction industry in the United States.

But in 2006 and 2007, construction in the commercial, retail and highway segments has not mimicked the housing slowdown. For steelmakers and the ferrous scrap industry that supplies them, this is not a bad trade-off, as non-residential and infrastructure projects tend to be more steel-intensive.

What else helps keep scrap steel prices high? Certainly, when automakers are operating in a higher gear, that propels steel and scrap markets.

ENGINE-DRIVEN

The short-term health of the automotive sector is less certain.

The good news is that Americans and citizens of other nations continue to buy cars. For steelmakers and scrap suppliers, the less pleasant news might be that the American love affair with heavyweight SUVs and large pickup trucks may well be fading.

The inverse relationship between skyrocketing gasoline prices and the sale of large SUVs and pickups is hard to miss.

In Louisville, Ky., where Ford Explorers and some F-Series trucks are produced, the sales figures are tracked by the staff of the Courier-Journal in that city.

According to an April 4 news item from that paper, "Sales of Louisville-built Ford Explorers and F-Series trucks continued to lag in March [of 2007]."

That month's sales figures are part of a longer trend, according to the Courier-Journal. "Explorer sport utility vehicle sales fell 25 percent from a year earlier, to 12,876. F-Series truck sales, which include the Super Duty and the smaller F-150, were off 15 percent at 71,481. The percentage declines are similar to those of other recent months."

Perhaps of more concern to domestic steelmakers and their scrap suppliers is that smaller cars are increasingly making international voyages.

An Associated Press report in April noted that Japanese automakers are expanding their plant capacity at a time when demographics in Japan itself do not indicate that more cars will be purchased domestically.

The most recent figures at press time available from the Japanese Automobile Manufacturers Association (JAMA) show that Japanese factories exported nearly 520,000 passenger cars in February of 2007. This was an increase of more than 54,000 units (11.7 percent) compared to the 465,000 cars shipped out in February of 2006. (The figures are for cars shipped globally, not just to the U.S. market.)

Those looking for a new source of imported vehicle concerns are pointing to South Korea in light of the recent trade pact between the United States and that nation.

The United States, however, is already the biggest overseas market for Korean automakers, absorbing some 700,000 Hyundais and KIAs in 2006.

Tariffs being removed by the trade agreement run both ways, but analysts see South Korean luxury shoppers gravitating toward upscale Japanese and German-made cars rather than U.S.-made models. Current figures reflect that. According to a Korean trade association, only 11 percent of imported vehicles last year were made in the U.S., compared to 59 percent made in Europe.

For steelmakers who serve the domestic auto industry, the price of oil will be closely watched, as will American automotive buying habits if the prices stay aloft.

HARD TO ARGUE

Despite any concerns about fewer houses or smaller cars here in the United States, the market has spoken clearly regarding global demand for ferrous scrap.

The first quarter of 2007 witnessed some of the highest prices in ferrous scrap history— in actual or inflation-adjusted dollars.

For the last several months, generators of steel scrap have enjoyed some of the best markets in recent memory for their scrap metal.

The author is editor in chief of the Recycling Today Media Group and can be contacted at btaylor@gie.net.