by MAURA KELLER
The shortage of lumber has made headlines in recent weeks as manufacturers and home owners alike grapple with trying to find much-needed material.
The same can be said for steel as it faces short supply in the U.S., with prices surging and attention turning to the recycled metals marketplace.
CashForCars.com’s Thomas Hopkins said the U.S.’s steel and aluminum tariffs are having a direct effect on the increase in demand for these materials.
As Hopkins explained, as many U.S. based steel mills were shut down during the pandemic, the supply of steel has not been able to catch up with the massive increase in demand. Since August of 2020, U.S. steel prices increased by 160 percent.
“In order to meet this demand, the importation of steel and aluminum is becoming more common as the production of these materials in the U.S., is just starting to pick up,” Hopkins said.
The tariffs on steel and aluminum are also harming many businesses as they are not able to remain profitable with the increased taxes on these materials. This effect can also be felt in the automotive industry. Electric cars are becoming more and more popular, but many are unaware that these vehicles take six times the number of minerals to produce than their combustion engine counterparts.
“Metals, such as lithium and cobalt, are needed to produce these massive batteries that EVs depend on. This trend has caused massive spikes in many metals, most notably lithium and molybdenum, with a 91.4 percent and a 114.89 percent spike respectively, since the beginning of 2021,” Hopkins said.
Bruce Slosse, president and chief executive officer of Vendavo, a global price optimization and management solutions provider, said during lockdowns, workers were often told to stay home, typically meaning both primary production and dismantlers struggled to keep up with production numbers.
“For those that could produce at their usual rate, with reduced demand from their customers, they had to cut production when inventory levels ballooned,” Slosse said. “This is in addition to any issues that were caused by logistics and transportation curtailments caused by the pandemic.”
As the economic stress from the pandemic eases, it’s sometimes difficult to “restart” the workforce in tandem with either shortages or excesses of material required for production. And again, transportation constraints remain as supply chains rebuild.
So how is this impacting the scrap metal market? Mike Petruski is a managing director with B. Riley Advisory Services. Petruski leads the firm’s Metals & Mining Advisory Services vertical in the valuations of ferrous and nonferrous metal inventories, fabricated metals products, and machinery and equipment assets. With more than 30 years of industry specialization, Petruski has deep knowledge of international metals market pricing trends and works closely with asset-based lenders, investors, and private equity groups on complex, syndicated ABL credit facilities and the valuations necessary to expedite such transactions.
According to Petruski, in the short-term, prices for scrap should remain strong during 2021 with obsolete ferrous prices strengthening as mills use up prime sources. Additionally, due to some scarcity in prime from the manufacturing plant shutdowns earlier in 2020, obsolete scrap has seen increased usage in mills and should remain that way as long as the demand is strong downstream.
The metals market status may also mean a widening of discounts from prime LME/COMEX pricing for nonferrous materials. “The runaway pricing for nonferrous that we’ve seen this year, especially in aluminum, when you add in the Midwest transaction premium, almost certainly means the discounts for scrap will be higher than usual,” Petruski said.
Pandemic impacts aside, there are other issues at play, affecting the scrap metal market. One issue is quite simple – cars are on the road longer, meaning less feedstock for shred.
“Also, the continued electric arc furnace (EAF) expansion means more scrap demand in the near future and the decarbonization of mills – less integrated mills in the future means more consumption of scrap for EAFs,” Petruski said. “Additionally, China has re-entered the world market and is now importing ferrous scrap and loosened restrictions around importing nonferrous scrap so the export market continues to be a draw for material.”
While there is a shortage of metals in the short term, Petruski said it should balance out heading into the future. Steel demand for automotive, including over-the-road trucks and trailers, RVs, appliances and infrastructure construction is expected to be strong domestically through 2021.
“That, paired with high demand of export scrap from Turkey and India for heavy melting steel (HMS) and shredded scrap, has caused a scarcity of supply in the market. All the manufacturing industries are playing catch up on supply. When demand returns, then we will see supply balance,” Petruski said. However, future shortages could come into play with added electric arc furnace capacity. The mini-mills like Nucor and Steel Dynamics operate EAFs that primarily consume ferrous steel scrap unlike the integrated mills with blast furnaces that require coke, limestone and ferrous scrap (or DRI or HBI).
“Today over 71 percent of domestic steel production comes from EAFs but the amount of good ferrous manufacturing scrap, busheling, has not kept up with demand,” Petruski said.
In Hopkins’ opinion, the scrap and metal prices will continue to increase until U.S. steel production meets demand, or the tariffs on steel and aluminum are reversed.
“Tariffs are having the opposite effect of their intended purpose. Increased demand in these materials is pushing businesses to import finished goods created from steel or aluminum rather than manufacturing them in the U.S. to avoid the tariffs,” Hopkins said.
For the scrap metal market, the future is very bright overall. As Hopkins pointed out, with recent trends in green energy, consumer shifts towards products made of recycled materials, and the rising prices of non-recycled ferrous and nonferrous metals, manufacturers will start turning towards recyclable scrap material to meet their productivity demand.
This is especially true for electric vehicle manufacturers who are purchasing massive amounts of very expensive materials,” Hopkins said. “We’re seeing the S&P GSCI Industrial Metals index rise by 17.5 percent year-to-date, indicating that there is serious and sustainable growth in the metals industry, and in turn, the scrap metal and recycling industry.”
Slosse added that the long-term implications are inherently tied to increasing demand for steel and copper especially if the current infrastructure bill becomes law, as well as other metals essential to the electric vehicle boom.
“Primary metal production capacity will continue to increase, but due to these assets being capital intensive, investment will tend towards reducing risk – a bit slower than demand to ensure full asset utilization to meet return on investment and payback targets,” Slosse said. For recyclers, this also means the scrap metal markets will be in a good condition for strong prices, but they will need to have business agility to pivot for short-term, locally significant exceptions.
“If your local market has new production capacity coming online soon – either primary or smelting/recycling – plan accordingly,” Slosse said.
Recyclers should also keep in mind that the current shortage is probably more of a momentary supply issue from the impacts of COVID and the economy’s recovery.
“The short-term shortage in some markets is due to transportation issues including a lack of trucks, railcars and shipping containers,” Petruski said. “But in the long term, with increased domestic capacity coming online from new EAF production, there may soon be a persistent scrap shortage from what the historical supply balance has been.”
Published in the August 2021 Edition
