The recycled metals market is seeing the first signs of improvement in months, thanks in part to more and more people becoming optimistic that the economy and the infrastructure changes being proposed by the new Trump administration will have a big impact on the metal markets.
In recent months, stainless steel and aluminum prices have shown slight increases throughout the U.S. and Canada. Of course, a solid benchmark for steel prices is the Dow Jones US Steel Index, which tracks major steel producers throughout the world. The domestic steel prices, which appear to be on the increase, are directly linked to the stocks of U.S. steel companies.
As Garey Rittenhouse, president at Regional Metal Services, Inc. explained, aluminum, copper, and nickel have all seen rallies in pricing and shifts in underlying consumption patterns.
“In aluminum, we continue to see primary consumers reaching lower into the supply chain as they seek alternative metal units at greater value versus primary metal,” Rittenhouse said. “For copper, recent price escalation has seen spreads widen in response to weaker consumer demand and skepticism in the viability of underlying markets. Nickel is similar to copper in many ways with a reflation of terminal values but a skeptic base of market participants closely monitoring market dynamics with a conservative opinion prevailing.”
Regional Metal Services, Inc. is a secondary and primary nonferrous base metals trading firm. In this capacity, Rittenhouse oversees the purchasing, sales and product development for nonferrous metals with a specialization in aluminum secondary and primary grade products. In addition, Rittenhouse also provides consulting and advisory services to consumers of aluminum scrap metals within the rigid can sheet, automotive body panel, and extruded shapes industries.
According to Todd Safran, vice president and chief operating officer of Safran Metals, Inc. competition within today’s recycled metals marketplace is fierce and more competitive than ever before.
“We work in a global market with bids coming from all over the world via many different electronic platforms,” Safran said. “Where in the past you might have been bidding against one or two companies, now its 50 or 100 companies.”
As companies decrease profit margins in the hopes of grabbing a piece of this ever-shrinking pie, many have also tried to expand and become more of a “one stop shop” to handle as many commodities as possible.
As Safran explained, the days of truly specializing in a specific commodity or service aren’t as prevalent now as everyone tries to have their hands in multiple ventures.
“At Safran Metals, we have figured out over our 75+ years what we are good at and what we truly excel at. It is pretty hard to be competitive on 100 different items of scrap,” Safran said. “That being said, we still believe if you focus on what you do best and service your consumers with a product they truly can count on, one can remain an important supplier despite the enormous amounts of competition. Quality truly wins out and when it comes to red metals and insulated wire, we still believe we have the knowledge and name to survive against a true global market.”
During the last three years, Rittenhouse has seen the meaningful impact of both lower available obsolete grade scraps and margin compression throughout the industry.
Rittenhouse believes the stagnation and downfall of recycled metal pricing can be traced to two meaningful catalysts:
•The financial crisis of 2008/2009.
•A contraction in global metals demand.
In the case of the financial crisis, the catalyst was a sharp decline in consumer demand, which in turn meant that the sale of consumer durable goods rapidly declined.
“In response, the life cycle or obsolescence cycle for such durable goods was extended,” Rittenhouse said. “I believe this was the start of the supply impairment which we are still feeling today.”
As far as the contraction in global metals demand, Rittenhouse believes this is the result of maturing growth in what was considered developing countries (such as China and India) and the real contraction of growth in the developed economies, in the United States and Europe, etc.
“Despite central bank intervention on a global scale, real economic expansion in the developed economies has been stubbornly slow in rebounding. And despite growth in industrial manufacturing activities, the level of post-consumer obsolete grade scraps has dwindled meaningfully lower and still remains historically subdued,” Rittenhouse said. “While recent terminal market values for base metals have indeed begun to escalate, this sales revenue increase has in many ways been passed through and down the supply chain which has had limited success in meaningfully reflating operational margins.”
“The combination of lower sales revenues, lower supply, and margin compression created unprecedented stress on scrap processors and even on consumers,” Rittenhouse said. “The result was the closure of many collection facilities and the financial impairment of scrap processing companies and a few scrap consumers.”
A Change In Direction
The financial strains upon the recycled metals industry have impaired the viable operations and earnings of many key market participants. As Rittenhouse explained, even as we see terminal market values escalate, we see earnings announcements for physical 2016 which still bear the mark of substantial operating losses for large scale processors, dealers, and even producers of value added products made from scrap metals.
“I believe, a smaller operational footprint within our industry will result and that some market participants may remain in the grips of balance sheet repair for some time in the future,” Rittenhouse said.
When evaluating what has been the instigator beyond the downturn in the recycled metals market and the subsequent upturn in early 2017, all fingers point to China, which is the world’s largest supplier of copper, steel and aluminum.
“When demand fell off there, it affected commodity prices which dropped to lower levels,” Safran said. “Once the price drops, margins tend to shrink and the desire to scrap certain types of metal at the lowest levels of our supply chain, becomes marginal at best. What might have paid for recyclers one day might not pay in a down market and that certainly can create stagnation.”
As China was a big factor in seeing a downfall in the market, it has been one of the leading indicators of this upswing as well. Imports and exports out of China have far been exceeding expectations thus far.
“On top of that we are seeing labor disputes in Chile and governmental issues in Indonesia, both of which are causing supply concerns from two major mines,” Safran said. “Couple this with a new administration here in America that is supposedly pro-business and pro-infrastructure and speculators are extremely bullish on copper right now. The one interesting factor is if free trade becomes an issue. I think that’s still very much a question as I don’t know how protectionism would look in our industry.”
In addition, Rittenhouse advised that the industry look beyond just the recycled metals markets to fully understand why we are see the pricing for scrap metals increase.
“Just like equity markets, the terminal market prices reflect the forward looking nature and expectations of market participants,” Rittenhouse said.
“Stoked by central bank policy actions, the promise of more physical stimulus, and seeking yield, we have seen participants begin to take positions in the base metals arena. Only time will reveal whether the perception of market participants materializes into a sustainable reality for metal values remaining at higher levels.”
Rittenhouse does think it somewhat revealing that while base metal terminal values have escalated, many primary producers have seen this as an opportunity to sell forward future production to lock in operating margins.
“I take this as a potential lack of producer conviction that market gains are sustainable in forward years,” Rittenhouse said.
Tactics That Work
In the earlier stages of the recycled metals pricing rebound, many industry participants chased volume growth by passing along revenue gains to lower level suppliers.
However, in most cases a meaningful uptick in volumes and earnings did not result from this activity.
“As a result, this has led participants to focus more on rationalizing operations, containing costs, and rebuilding or repairing balance sheets,” Rittenhouse said. “Capital expenditures remain under pressure with subdued reinvestment in businesses.”
Metals are expensive right now so industry experts advise scrap metal recyclers to not be afraid to take a profit.
“Nobody is going to ‘out guess’ the market so focus on making sound business decisions,” Safran said. “The top price may need to be sacrificed slightly in favor of more stability. Unfortunately many times it’s the highest bidder that wins out when that bidder might now be the most qualified. We here at Safran Metals do business with companies and people we like and trust. Business is supposed to be win-win and we look for the long-term relationships that are not only going to help us but the companies we do business with too.”
As far as what the future for the industry holds, Rittenhouse believes that each of the base metals face meaningful individual challenges within the recycling industry for various reasons.
“I do not see any one metal type or sector that stands out in either availability, demand, or margin opportunity,” Rittenhouse said.
It’s important to remember that recycling is an industry that goes in cycles and it’s always a wild ride. Once you think you have things figured out, the markets or the industry throw you a curve ball.
In fact, the need to diversify revenue streams and rationalize operational costs has never been greater within the industry.
“Too many participants are still narrowly focused within a core industry, product sector, or region of operation,” Rittenhouse said. “Owners and operators need to challenge the idea of their historical role in the industry and look at new ways to add value to the products or services they provide customers.”
This task is somewhat more complicated today as the traditional actions of industry participants such as capital investment in new processing technology may not have sufficient returns to justify the costs.
With regard to rationalizing costs, Rittenhouse advised recyclers to acknowledge and act earlier when operations begin to falter and not be so reluctant to exit underperforming sectors or locations.
“Be on your toes and be ready for anything,” Safran said. “Our industry is so vital to this world and the services we provide are a big part of what drives this economy. We are a scrappy, innovative bunch of recyclers and the world needs us. I don’t know what tomorrow brings but our industry will certainly find a way to flourish and continue to thrive.”
Rittenhouse stressed that the future for recycled metals is brighter and more robust than we have experienced over the last few years. The availability of obsolete grade scrap packages will inevitably return to a historically normalized rate as we begin to see durable goods produced after 2009 reach maximum usable life.
“However, I believe that it would be in error to assume that the financial reward previously seen within our industry will naturally return in hand with an increase in available supply,” Rittenhouse said. “Meaningful over capacity still exists in the processor and collector segments within our industry.”
While many have refined operational costs, there are still a large segment of regional and national processors that are burdened by legacy capital investments in facilities and equipment.
“Future success may reveal a more adept and agile processor capable of scaling operations in a less capital intensive manner,” Rittenhouse said. “Perhaps in some sectors, consumers and producers that have delved deeper in the supply streams will centralize investment in onsite processing capabilities traditionally relegated to scrap processors and dealers.”
Published in the April 2017 Edition of American Recycler News