APRIL 2009

 

ON TOPIC


The economic impact on the metals recycling sector

Bob Garino

The decline in the price of metals has impacted the metal recycling sector, as well as the major producers of metals, who have seen demand for their products fall in this period of global economic crisis.

To explain the current market situation American Recycler spoke with Bob Garino, director of commodities with the Institute of Scrap Recycling Industries, Inc. (ISRI).

What is the current state of the domestic metal production sector in the United States in terms of recycling operations and major producers of steel and other commodities?

Garino: We look at industrial production as measured by the government – a very important indicator of the overall health of the economy. We’ve seen the manufacturing component of industrial production fall off the cliff. As industrial production is metal intensive, this has affected everyone all along the supply chain.

We are seeing less demand for industrial goods that has negatively affected the demand for raw materials and certain scrap materials that are vital to the manufacturing process. That is translating into lower demand and subsequently lower prices. It’s not just in the United States that we are feeling the effects of a slowdown – it’s global.

What effect could the Obama administration’s economic stimulus package have on the production and sales of metals in the United States and worldwide?

Garino: The stimulus package has very good potential to give life to the metals that are depressed because of the lack of industrial production. If this money is properly allocated to things such as infrastructure, that will translate into higher use for steel and other metals.

Stimulating the economy means stimulating the consumer. The key is to really have the consumer confident again to start looking at automobiles, appliances and everything else like that. Two-thirds of our economy is dependent upon consumer spending and without it; it is hard to imagine much of a recovery. It is also getting the credit marking working again so that people feel confident about borrowing money and for banks to lend money – that will drive the economy.

The economic stimulus package emphasizes, “buy America” in terms of construction materials and metals needed by industry. How do you see this policy element affecting the domestic metals production sector and the metals market?

Garino: The statement says “buy America,” but within that statement there are a lot of qualifiers. The devil is in the details. It’s far less onerous in terms of international trade than I think some people are speculating. There are exceptions and exclusions in the legislation.

What is dangerous about it though is that it suggests a more restrictive trade policy and a more protectionist point of view. ISRI is a strong supporter of free and fair trade, so without knowing all the details, we would not want to see artificial restrictions placed on trade.

The United States is import dependent on steel and I do not know what that package will do to that, other than suggest that it is protectionist. It could set off other countries doing similar kind of things, which is not good for anybody.

The Obama administration is playing a crucial role in trying to stem the decline of the automobile industry, appointing a car czar and a task force. How do you see these efforts playing a role in recovery and promoting the purchase of various metals by the auto industry?

Garino: The question is does the administration believe that the auto industry is so vital to the economy that we’ll support it no matter what? Is it just too big to fail? Whether that is true, I do know that a bankruptcy by General Motors is to be avoided, but I am not sure at what taxpayer cost.

A bankruptcy would have a tremendous affect all along the supply chain – it would affect the parts people right down to the steel that goes to manufacture GM cars, but I don’t know if it is in our long term best interests to continue to support a failed industry.

The metal recycling industry and infrastructure is important to maintain. If this decline in the price of metals continues, what will happen to this sector?

Garino: We have gone through cycles before. It will get better. There will be, as we are bouncing along the bottom, some companies that will not survive and others that will be absorbed into other companies. We’ll see a lot more mergers and acquisitions going on, especially in the latter part of the second quarter. It’s Darwinian economics – survival of the fittest.

I cannot predict who will survive, but it really depends upon how smart one manages their business and watches their receivables.

Do you foresee a time when prices for ferrous and nonferrous metals will increase?

Garino: Absolutely. I am a believer in the super cycle that we seem to be in. We went through six years of pretty much synchronized global growth and now we are in a period of synchronized global contraction. This is just a small cyclical downturn in a longer-term secular increase. You have to balance what is going on in that cycle, but the longer secular trend is very positive.

Industrial production, whether it is in the United States or Russia, China, Brazil, India or any of those other countries, is not going to stop. As it gets back on track, there will be a demand for everything – copper, aluminum, nickel, stainless steel, zinc, iron and steel. Prices will rise. We will get through this.

I can only go with what mainstream economists are saying and they expect to see that as this de-stocking continues through the supply chain, that it will end soon. Most people seem to be saying that we should see some rays of positive, fresh consumption in the latter part of this year.