BY MIKE BRESLIN
It’s about time U.S. businesses and consumers are getting a price break on something… oil and its cornucopia of derivatives.
Now, many oil exporting countries are having large revenue shortfalls because many importing countries are having stagnant or weak economic growth and need less oil. Fortunately, over the past decade, the U.S. has experienced an explosion in energy production due to technology breakthroughs like fracking and horizontal drilling to extract oil and gas from shale formations, or extract oil from tar sand. Low crude oil prices, of course, are also harmful to U.S. energy producers, particularly deadly to newer projects trying to recover investments and marginally profitable ones.
Until global economic conditions improve and demand for oil returns, these lower prices also affect U.S. recyclers and environmentalists in many ways. Like at most businesses, the reduction in operating expenses contributes to a fatter bottom line. However, lower oil prices are not good for all concerns, particularly electric and hybrid vehicle makers, and clean air advocates. Going electric made more sense when gas was $4 per gallon, but now half as much.
Long term, low oil prices may not be good for our economy as a whole. Short term, lower gasoline prices are already affecting car sales. The auto industry had its best November in a decade. This growing consumer demand was led by pickup trucks, SUVs and high performance gas guzzlers.
The bottom line: all countries are being affected by the drop in oil prices and the repercussions are systematic.
For a global overview of the energy/scrap situation, we called upon Joe Pickard, chief economist and director of commodities for the Institute of Scrap Recycling Industries (ISRI). He reported, “For scrap metal processors, 2015 has gotten off to a difficult start and that follows pretty challenging conditions last year. Given the volatility in commodity prices, scrap metal dealers need to be especially careful with regard to controlling inventory, a lesson hopefully learned in the aftermath of the recession.
“There are a couple of positive aspects of falling oil prices. First, cheaper energy prices mean cheaper processing costs for scrap metal processors. And secondly, when consumers, in the aggregate, have more money to spend they are going to buy more appliances, automobiles, and other goods because they have more discretionary income. In theory, that should produce more demand for new stock, but also increase the supply of scrap. But overall, the rapid drop in oil prices is having a net negative impact.
“As oil prices drop other commodity prices also tend to drop. We’re seeing that, especially on the nonferrous side with copper prices dropping sharply. As energy prices drop, that also has an impact on energy sector investor, demand for steel and ferrous scrap. The crash in oil prices also reflects a lack of confidence in global economic growth. In addition, there’s concern about excess commodity supply, especially with iron ore, oil and other commodities. So we’re seeing expectations for slower global growth and excess commodity supply across a range of commodities.
“The other thing we are combating is a much stronger U.S. dollar in recent weeks. That makes our scrap that much more competitively priced in overseas markets and makes imports cheaper as well. Also, when primary metal prices come off like we’ve seen with refined copper, iron ore or other primary metals, that makes scrap relatively less attractive as well. In overseas markets I think it’s going to be an uphill climb in the near term at least,” said Picard.
Bob Stein, senior vice president of nonferrous marketing at Alter Trading in St. Louis was also kind enough to share his thoughts on the global implications of cheap oil on the scrap metal business.
“There’s been a negative impact on base metal prices as a result of a couple of things, but certainly because of the price of oil and related petroleum products. Oil is a major driver in the economy of most nations, whether you are an exporter and make a lot of money from exporting like the Saudis, Russians or Canadians, for example. Or, as a buyer, you would think lower prices would be beneficial. They aren’t necessarily. If you have a freely traded, highly transparent, commodity that drives the economy such as oil, it drives down whole economic sectors. That’s basically what’s happened.
“The other thing that’s happened is that the U.S. dollar is exceedingly strong. And the U.S. is now basically self-sufficient in petroleum products. The dollar is at a 9 or 10 year high against the Euro. It’s also strong against the Canadian dollar and their economy is highly dependent on the export of petroleum and other raw materials. The Canadian dollar has suffered immensely because of that. So what you get by disinflation is that prices come down and it discourages people from going out and buying commodities because they think they are going to be worth less in the future. And, prices are coming down on most everything in our economy.
Stein pointed out that base metals are traded in U.S. dollars and the dollar continues to strengthen. That’s why U.S. metal exports are down lately. U.S. prices in terms of foreign currency are exceedingly high. For a scrap trading partner of the U.S. to buy American scrap, their currency is devalued and worth less than four or five months ago. Conversely, the value of North American commodities, as expressed in foreign currency, goes up tremendously. India is a good example. The Rupee kept going down and U.S. scrap metal became more and more expensive. For the most part, Indian scrap was being processed into Indian domestic goods and they had no chance to sell products at the value they paid for the scrap in U.S. dollars.
“As a buyer and seller of scrap metal with 54 processing facilities in the U.S., you would think it would be great that if the price of petroleum goes down, our costs go down,” Stein continued. “We have fleets of trucks and processing equipment that run on gas and diesel, but the truth of the matter when prices go down it’s an inherent disincentive for people to sell scrap and get it into the recycling sector. People tend to horde material waiting for higher markets. We’ve always been bailed out by the markets. The scrap metal industry usually thrives in inflation and gets hurt in deflation,” says Stein.
Jim Woods, senior director of sustainability communications at the American Iron and Steel Institute commented on the situation. “The softening of the oil exploration market, combined with the continued high levels of dumped and subsidized pipe and tube imports, has impacted steel’s energy market. While lower oil prices may result in lower energy costs for steel production, they also result in less investment in energy infrastructure and exploration for oil – which are steel-intensive processes. Demand for scrap follows demand for steel. When demand for steel is high, demand for scrap and other raw materials are similarly high. To the extent falling oil prices can impact demand for steel, such as with curtailed oil exploration, demand for scrap could also be impacted.”
Newell Recycling Southeast is the largest metal recycler in Georgia and operates 22 facilities in Georgia and Alabama. The company operates three mega shredders and two high capacity shredders.
Frank Goulding, vice president of ferrous marketing at Newell, reported on how lower oil prices are affecting Newell. “Generally speaking, our business is suffering because with lower oil prices comes lower commodity prices. This is making it difficult to buy scrap, make margin and make our sales goals right now. It’s a challenge. You have to pay competitive prices to acquire scrap.
“Directly, it’s certainly helping with lower transportation costs with our own fleet of about 35 trucks,” said Goulding. “We haven’t seen any effect from the railroads; their rates have remained the same, fuel surcharges are still in place as they are on a 60 day rolling average for calculating their surcharges. I suspect they will drop off as will the fuel surcharges from common carriers.
“There’s a lot of pressure on our domestic steel makers to drop their prices…so we’ve seen huge price drops. Currently, a very small amount of our ferrous scrap is exported because the prices are too low. With the dollar trading at record highs against the Euro, Turkish Lira, and Indian Rupee, it has made the U.S. a very expensive place for foreign steel producers to buy scrap. Regardless of the cost of energy, when you have an oversupply of domestic scrap, coupled with a slowdown in domestic steel production, you are going to see scrap prices fall. The composite scrap index is down almost $100 since last January. Of course, the base metals also followed… copper, aluminum, zinc and lead have also gone down.”
Goulding pointed out that most scrap processors are in a market squeeze these days because it’s hard to buy raw materials with a sufficient margin to operate. Also, raw material is not as available because a lot of the smaller dealers are sitting on scrap metal, or attending to other activities because they can’t make money hauling scrap right now.
“We are also seeing a slowdown by the steel mills,” Goulding continued. “But it’s not due to a shortage of supply. Mills are getting all the scrap they need, as they’ve reduced their buy because they are not producing as much steel. I expect mill operating costs should go down, too. For example, they use gas in their reheat furnaces and when heat treating.
“I think it’s going to be bad for the next six months before things start up-ticking. I don’t see the dollar weakening any time soon. With an unstable world economy, the U.S. is still a safe haven to put your money,” Goulding concluded.
Certainly there are winners and losers in this oil price development, but from a global perspective the U.S. is in a far better position than several oil exporting countries whose economies and political systems may be in jeopardy.
Published in the March 2015 Edition of American Recycler News