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The Trade Numerologist: Scrap's trade problem

02 November 2017 John Miller

Here's a paradox, and a challenge, for recyclers and shipping companies involved in global scrap trade: As the global market is getting bigger, scrap trade appears to be shrinking.

The global scrap metal market has been growing and is expected to increase to $406.2 billion in 2020 from $277.1 billion in 2015. However, trade in the most important category of scrap, steel, has been falling, according to an analysis of trade data from IHS Markit's Global Trade Atlas.

Total global scrap steel trade, 2011-2016

2011$57.3 billion
2012$50.9 billion
2013$43.6 billion
2014$43 billion
2015$28.4 billion
2016$25.7 billion

It's not just steel. Total copper trade, for example, has declined to $14 billion in 2016 from $28 billion in 2011. And it's not just because of falling prices. Overall scrap trade in key metals has also been declining by weight.

So what gives?

The answer is in large part a shift in where scrap is produced, more toward developing countries. A developing economy first starts generating large amounts of scrap a couple decades after it first starts mass-producing cars, refrigerators and other metallic consumer goods. That's why the US scrap market took off in the 1950s and 1960s. It's happening now in China, Turkey and other fast-growing economies that are producing more scrap of their own, and needing to import less.

Chinese imports of scrap steel, 2011-2016

20116.8 million kilos
20125 million kilos
20134.5 million kilos
20142.6 million kilos
20152.3 million kilos
20162.1 million kilos

China is about to enter what analysts call its "Scrap Cycle", as its first generation of metal-based industrial goods is about to get harvested for scrap. China's manufacturing will also contribute to growing scrap supply. Stamping processes in factories that make everything from toys to iPhones generate excess metal. It's also trying to build up its internal market. In September, it told the World Trade Organization that it would ban the import of 24 categories of scrap from the US.

Despite high supply, it remains unclear how much scrap China will export. Its exports thus far have been anemic.

China scrap steel exports, first six months, 2013-2017

2017$36.4 million

Even if China doesn't aggressively enter world scrap markets, its loss of appetite for imports is a problem for US. scrap yards, especially those in Pennsylvania, Ohio, Michigan and other states with a history of heavy metal production, and the logistics firms that support them, that have long depended on international markets to prop up prices, which have fallen this year. US. scrap steel exports, also, have taken a hit.

US scrap steel exports, 2011-2016

2011$11.5 billion
2012$9.4 billion
2013$7.6 billion
2014$6.2 billion
2015$4 billion
2016$3.6 billion

The US started mass-producing cars, washing machines, refrigerators and other metallic consumer goods on a big scale decades before Europe did. The upshot is a mountain of recycled metal in scrap yards - and dominance of the global scrap trade, along with other longtime industrialized nations.

Top exporters of steel scrap, top six months of 2017

US$2.2 billionFrance$1.2 billion
Germany$1.7 billionCanada$981 million
Japan$1.4 billionBelgium$695 million
UK$1.3 billionRussia$570 million
Netherlands$1.3 billionCzech Republic$513 million

The US has carved out markets all over the world, but mainly in countries with 2nd tier levels of industrial development, like China, Turkey and Mexico. The main use of steel scrap is in so-called electric arc furnaces, where steel is melted down to make fresh batches of steel, instead of making the metal the old-fashioned way with iron ore, coal and limestone. Turkey is key market for global scrap, because of its network of electric arc furnace mills, which produce steel for much of the Middle East. Global scrap and steel supply chains mean that a skyscraper in Dubai could start off as a car in Missouri.

Top destinations for US scrap steel exporters, first six months of 2017

China$429 millionPakistan$120 million
Turkey$333 millionCanada$111 million
Taiwan$254 millionVietnam$87 million
Mexico$228 millionSouth Korea$72 million
India$126 millionPeru$69 million

Mining executives say that as reserves shrink and the cost of extracting ore rises, the future of large-scale metal production could be in scrap. However, it's proven difficult for companies to consolidate. The supply chain is still reliant on local yards that collect bicycles, shelves and other metallic consumer goods from pick-ups, peddlers and pedestrians.

There are only a few companies that have managed to scale up in scrap, such as Commercial Metals Company, Sims Metal Management Ltd. and Auribis. And potential growth appears to be limited. Texas-based Commercial Metals, for example, had sales of $4.6 billion in fiscal 2016, down 23% from $6 billion in 2015, small compared to iron ore miner's BHP Billiton's $30.9 billon in revenue in fiscal 2016.

The trend of countries generating their own scrap instead of importing suggests that the world might also be averse to consolidation, and countries and companies will remain focused on their own neighborhoods.

The Trade Numerologist is IHS Markit's unique weekly look at global trade by award-winning journalist John W. Miller, formerly of the Wall Street Journal, using proprietary numbers from IHS Markit's Global Trade Atlas database, the world's most complete and accurate set of trade numbers.



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