Imported Steel Impacts Domestic Production
by MAURA KELLER
As one of the most recycled metals on the planet, steel has offered an extremely high recycling rate, which as recently as 2012, stood at 88 percent.
However the recycled steel industry has been a cyclical one, with both up and down months, relating to both price and demand. Since January 2014, we’ve seen roughly a 60 percent decline in pricing, with only a couple of modest “up” months, only to be followed by a continuing downward trend.
According to the Steel Recycling Institute (SRI), the overall steel recycling rates for 2013 was 81 percent, down from 92 percent in 2011. Likewise, the steel automotive rate for 2013 was 85 percent, down from 95 percent in 2011 and the recycling rates of steel appliances for 2013 was 82 percent down from 90 percent in 2012. The steel recycling rate is an expression of the quantity of scrap reprocessed as a percent of the volume of scrap available. It doesn’t indicate the recycled content of steel.
According to the January 2016 U.S. Geological Survey, Mineral Commodity Summaries, China’s slowing GDP growth and continued high production rate of crude steel is having a significant effect on the expansive steel supply. Three years ago, in 2013, China had an estimated 35 to 40 percent more steelmaking capacity than it needed. As the U.S.G.S. states, in 2015, “Chinese surplus steel sales continued to expand into other industrialized countries with steel-making capability, such as the U.S., reducing the consumption of U.S. domestic crude steel production.” Also, the rise in steel imports from 2013 to 2014 was sustained through 2015, creating a difficult competitive market for domestic iron and steel products in the U.S. Imported steel adversely affected U.S. domestic production in 2015, resulting in idled or permanently closed iron and steel operations across the country.
According to Brett Muckle, president of Asset X, gone are the days when you could build up steel inventories in the summer months when pricing was low, and sell in the winter when prices were considerably higher. Recyclers must focus on turning inventory as quickly as possible to mitigate price volatility, reduce operating expenses to remain as healthy as possible, and watch receivables.
While there are a myriad of causes of the volatile steel recycling market, including China’s role, one impact on the recycled steel industry is dropping oil prices, which have had a big impact on steel demand. Declines in the consumption of goods in the U.S. domestic energy sector, especially in the development of new oil and natural gas projects, has contributed to reduced steel demand. As the level of fracking has dropped, so too has the need for steel for oil fracking equipment and oil rigs.
However, as Andrew Babcock, director of inventory strategies at Tiger Capital Group, explains, the oil and gas industry is not an extremely large driver of steel consumption, probably accounting for about five percent of domestic consumption. Tiger Capital Group is a leading provider of asset valuation, advisory and disposition services to a broad range of industrial, retail and wholesale clients.
“In terms of steel demand, one should look at the ripple effects of dropping oil prices on the global economy,” Babcock said. “The construction industry is the main consumer of steel products, so slumping oil prices slow construction in markets that are heavily reliant on oil, particularly Brazil, Russia and the Middle East.”
Capacity utilization rates at U.S. steel mills are near 70 percent, which is down roughly 7 percent from a year ago. Muckle would argue any industry that operates at 70 percent of their capacity is not healthy, and these figures are probably skewed because the flat roll mills, which supply the “red hot” auto industry, are doing well.
“If you were to only look at steel mill production, excluding flat roll, I believe the capacity utilization rates would be far lower,” Muckle said. An example is France-based Vallourec Star’s 3 week shut down of their $1 billion Youngstown, Ohio steel mill, which produces oil country piping.
Vallourec Star is also offering voluntary six month layoffs, and is monitoring the oil and gas market for further “blackouts.”
As Muckle explained, this is one mill, with 1,000,000 tons of designed annual output capacity dedicated to the energy sector. The “trickle down” economics of this and numerous mills operating well below capacity has had an enormous affect including the continued rash of bankruptcies in everything from scrap yards at one end of the supply chain, to steel service centers on the other end.
“The long list of scrap yard shutdowns such as Sims Metals closing 35 locations, is only further proof of the metals sectors’ downward spiral,” Muckle said.
Richard Reese, chief executive officer of Rabin Worldwide, a company that specializes in industrial auctions, has conducted several metal scrapping auctions throughout its history. Reese has firsthand knowledge regarding trends in the metals recycling industry, and, as such, is seeing a decrease in demand for support industries such as trucking, crane services, machining, fabricating – all of which are built of steel.
“An increased amount of this type of equipment is now coming into the used marketplace as a result,” Reese said. “Availability equates to less demand for recycled metals, including steel, resulting in lower prices paid for recycled metals. Extraction, preparation and shipping prices have remained the same, however, which makes them cost-prohibitive.”
In selling surplus assets, metal and steel play an important role. At the height of prices four years ago, salvage companies were competing with end users for materials.
“Scrap iron, which was going for nearly $400 per ton and made profit for everyone involved, has become too costly to extract and prepare for current demand,” Reese said.
What’s more, the prices within the recycled steel industry are down considerably. “Companies that rely on collateral value, particularly of inventory, will likely have some liquidity constraints over the next 12 months,” Babcock said. “Against this backdrop, metal recyclers should pay attention to global demand, pricing, export markets, and industry outlooks for end users of steel.”
As some steel mills close sites, the lead-time for new steel has increased and the demand has increased for some steel products. As such, this increased demand and increased lead time resulted in an increase in price in some recycled metals.
“There is still too much steel-making capacity both globally, and domestically,’ Muckle said. “Any increase in lead times is a function of mills keeping stocking levels low, rather than an increase in their order books. With so much price volatility in the market, steel mills are carrying much smaller inventories to mitigate pricing risk, and thus it takes longer to satisfy orders”
So what does this shifting in steel demand and availability mean for the recycled metals business? Are there certain areas of recycled steel that are being requested more than others?
According to Babcock, inventory levels are up. Over the past 15 years, China has been the major driver of scrap metal consumption.
“I see China as a big question mark, with economic growth expected to continue to slow,” Babcock said. “Consequently, global steel consumption should decline. This time around, I believe we are looking at a longer down cycle, perhaps another 12 to 18 months versus what we saw in 2002 and 2008 when there were relatively quick recoveries.”
Of course as mills keep less finished steel on hand and witness a reduction in their business, they need to melt less. This lowering demand trickles down the supply chain, to recyclers who find it harder to sell their tons. According to Muckle, recently released data of Scrap Metal Exports show we hit a nine year low in 2015. Tonnages that historical have gone offshore, are now pushing their way inland to mills with reduced demand causing an over supply and the overall pain is felt in the recycling markets.
In 2008, Muckle asked a professor at Boston’s Babson College, School of Entrepreneurship about scrap yard health in a time of steel mill shutdowns and uncertainty. “His response was, ‘cut quick and cut deep.’ Recyclers reduce overhead and ‘keep their powder dry’ when it comes to their finances. You need to maintain some level of financial reserves or “rainy day funds” because it’s pouring and there is no sunshine in the forecast. The general consensus is these markets don’t look to be turning anytime soon, and could last for at least another 18 to 24 months.
Reese also stressed that until China’s economy bounces back and their appetite for recycled metals grows, the short term future for metals will continue to stagnate.
“Those recyclers who can weather the storm by diversifying their operations into areas they have not been involved in previously, such as demolition, electronics recycling, etc., as well as reducing debt and maintaining cash flow will be poised to take advantage of a market turnaround when it occurs,” Muckle said. “This is a battle of attrition, and the last person standing will win.”