Extreme conditions: ferrous markets have been on the type of wild ride sought after by extreme athletes.

Commodities markets have often been compared in their search for supply and demand balance to the illustration of two people on a playground seesaw. The device is perpetually shifting from one side to the other--either too much supply or too great of a demand--and only for brief moments is it perfectly balanced on a horizontal plane. In the mind's eye, this illustration is usually played out with the mental picture of a couple of grade school children occupying either end of the seesaw.

What might add a little intrigue to the ferrous scrap market is that the two people on either end of the seesaw can be envisioned as extreme athletes, with tattoos prominently displayed and helmets and elbow-pads strapped on, seeking a wild seesaw ride, so the ups and the downs are a lot higher and lower and they come around a lot faster--often with a crash at the end.

UPS AND DOWNS. A review of ferrous scrap pricing in the last few years indicates a chart with peaks and troughs similar to those on a Richter scale during an earthquake.

In January of 2002, ferrous scrap markets were continuing to struggle through a market trough, with American Metal Market reporting No. 1 Heavy Melt composite pricing of less than $70 per ton. By late spring of 2002, the grade was up to more than $100 per ton--where it seemed to settle for a while until the fall of 2003, when monthly increases steadily lifted the price to more than $175 per ton in January of 2004.

Historically, that would almost certainly signal a market peak. But the see-saw was not finished rising on the demand side.

The next month, ferrous scrap shattered the $200-per-ton ceiling, and the AMM No. 1 Heavy Melt composite price even crossed $250 per ton in 2004. Some premium grades were reported to be selling at more than $300 per ton at times in 2005.

Pricing continued to hover in the $200-per-ton range early in 2005, although the seesaw moved up and down throughout the second half of 2005.

So, does the wild seesaw ride of the last few years mean the market has fundamentally changed, or was it simply another cycle in the elastic history of the market?

The answer could be yes to both questions. There is little reason to believe that market volatility is a thing of the past. Most observers would probably agree that a long-lasting market balance between scrap supplies and scrap demand remains as elusive as the Holy Grail of Arthurian legend.

But while volatility remains the same, the wild ride of the first half of this decade may have also been the result of fundamental changes in the way scrap flows globally and the way it is generated domestically.

300 MILLION TONS AND COUNTING. It will come as no surprise to anyone that the resurgence of the Chinese economy has provided many of the changes. In the past decade, China's steelmakers have risen to the No. 1 spot globally.

Even though much of China's steel is produced with blast furnaces, rather than 100-percent-scrap-consuming electric arc furnaces (EAF), raw materials buyers representing Chinas mills have spanned the globe this decade seeking melting units--whether iron ore, pig iron or scrap--for their furnaces.

When one nation adds 200 million tons of steelmaking capacity in less than a decade, it has a profound effect on markets. In this case, it strained global scrap supplies and also familiarized a greater number of scrap dealers with the export market.

And China is not, in general, opening steel mills that are taking the business from existing North American and European steel mills.

Steel made in China is, generally speaking, staying in China to build roads, bridges, apartment buildings, office towers, cars, appliances, toaster ovens or virtually anything else one can think of that is in demand in a nation that is allowing corporations and individuals to accumulate and invest in ways that were strictly prohibited just two decades ago.

As Chinas steel industry has boomed, it has not been met with a shuttering of mills in other nations. In fact, Japan and South Korea's industries have benefited from China's boom by exporting finished steel there, and Europe's and North America's mills have been producing at rates to meet their own markets' needs.

When Chinese buyers started actively out-bidding domestic buyers for ferrous scrap, it helped send the pricing seesaw into fast motion, as the extreme athlete on the demand side gained a little more enthusiasm.

Just as restaurant owners would be reluctant to say they have too many customers--but rather too few tables--scrap dealers were reluctant to admit that there was too much demand, but rather they cited a scarcity of supply.

Throughout much of the market peak, increased scale prices brought out more scrap--the old auto bodies piled up by auto dismantlers and the rusty combines sitting in farmers' fields. This obsolete scrap was fed into metal shredders in record numbers during the past three years.

THE HOME FRONT. But while China boomed, the American manufacturing sector that produces stamping plant cutouts, fabrication trimmings and machine shop scrap did not necessarily cooperate by churning out more scrap.

There is a two-fold problem: A lot of the fabricating and machining has moved offshore, and the remaining plants are often the most efficient ones (that is, they make the least scrap).

America still makes plenty of steel. It still makes many of its own trucks, automobiles and appliances. But the manufacturing of a wide variety of smaller items that can be shipped affordably from China or Mexico is occurring there instead.

The result is that American households consume as much steel as ever in the form of appliances and autos that eventually are scrapped, while the American manufacturing sector is generating less scrap. The Steel Recycling Institute's statistics for ferrous scrap processed in 2004 indicate that the composition of the tons recycled in 2004 contained almost 35 percent more obsolete scrap than in 1980.

And it seems reasonable to suggest that from here on out, American scrap processors will be increasingly reliant on obsolete scrap--auto hulks, old appliances and metal harvested from demolished buildings--to provide a higher percentage of their tonnage rather than on industrial scrap.

This scrap now has several potential destinations: The 1.3 billion people of China are producing more steel and using more scrap. And in the world's two other largest markets (Europe and North America), electric arc furnace steelmaking has gained market share, which means that even in a static economy, there should still be steady demand for scrap.

As Chinas steelmaking capacity has grown, decision-makers there gravitated toward iron ore-dependent blast furnace steelmaking, rather than scrap-dependent EAF steelmaking. It is tough to say whether that was a wise decision, since while they have been less dependent on prohibitively expensive scrap, they have instead been saddled with iron ore prices that also reached historic highs in 2004.

But if EAF steelmaking should catch on in China, that could provide yet one more strain on scrap supplies.

VARIOUS VARIABLES. Several factors seem to point to a healthy baseline of demand for ferrous scrap. But in a commodities market, variables are the spice of life (and the bane of forecasters), so a few of those should probably be considered.

Iron Alternatives--Initially, electric are furnace steelmakers such as Nucor Corp. liked the idea of having abundant scrap metal as their feedstock while being able to avoid the often lengthy price negotiations that can determine iron ore prices. However, being dependent on one commodity soon brought the realization that it is good to have options.

For EAF steelmakers, some of these options have entailed significant R&D time and money. But it now appears that several of them have much better plans in place (or in some cases their own facilities) as a means to turn to other materials to help wean them away from the costliest scrap grades when pricing gets prohibitive.

Now more than in the previous decade, iron alternatives may be ready to act as a price ceiling mechanism that will slow down the wild upward ride of the scrap see-saw.

Emerging India--Another variable concerns the 1 billion people of India. Like China, this is a nation with a growing middle class. Unlike China, it has not seen the concentrated government efforts to spur massive building and infrastructure projects, which have helped drive Chinas demand for steel.

But India's time may yet come, especially if opportunity leads more Indians away from rural villages and into the nation's cities, as has happened in China in the past 15 years. Such demographic shifts--whether occurring in the United States in the 1940s and '50s, or more recently in China--inevitably lead to a craving for material goods and the opportunity to buy them. In many cases, that means new end markets for steel.

In 2005, some initial groundwork was also laid for the types of transportation infrastructure projects that could boost India's urban migration and manufacturing supply chain logistics in the near future.

China Tapping the Brakes--While economists consider the fate of India, China has not left their minds either. For just how long the phenomenal GDP growth rates can continue is always open to speculation.

Bears studying China are concerned that the government is hiding bank weaknesses that will eventually cause a severe crisis. Others believe the government will quickly curtail infrastructure spending later this decade after Beijing has completed its 2008 Olympics projects--thus sharply reducing the demand for steel. Clearly, what happens with China's economy will have a sharp effect on ferrous scrap pricing, because the nation is now the world's leading steelmaker.

Scarcity As the New Reality--It is possible that the 2.4 billion people of China and India, and their leaders, will continue to consume more of the world's resources as they transition from agrarian to industrial and information economies.

This being the case, the theory goes, then oil and mineral commodities have entered a new era of perpetual high demand and relative scarcity compared to the market Europeans and North Americans have grown accustomed to. Real and perceived scarcity is already causing changes: Expensive gasoline is causing sales of large SUVs to dry up. In the first two months of 2005, Texans--of all people--purchased 18 percent and then 22 percent fewer new SUVs vs. the same two months in 2004. Such a trend means not only less gasoline used, but also a lot less sheet steel.

Considering this and the other scenarios, one question becomes: Has ferrous scrap re-defined its trading range so that it will never again see the $65 per ton prices of 2001?

As with many things in life, one should probably avoid the word "never." From 1995 to 1998, those bullish on the scrap market were fairly certain that such low pricing was finished and that $200per-ton pricing would soon occur.

Unfortunately, a see-saw plunge in 1998 brought pricing down to a low trading range for the next three years and made $200 per ton seem like a far-fetched notion.

Eventually, the bulls were right, and the $200 ceiling was shattered. Now that it is, though, it might only mean that the ride has only become even wilder yet, with the extreme athletes on the ferrous scrap seesaw hitting new highs while still being able to plunge back down to Earth just as far as they did in the late 1990s.

PRODUCTION OF STEEL ON A TEAR

World crude steel production for the 61 countries reporting to the International Iron and Steel Institute (IISI), Brussels, exceeded 1 billion tons for the year 2005 before December figures have even been reported, an increase of 6.1 percent from figures for the same period in 2004.

In November, global production was estimated to be 94 million metric tons, 4.1 percent greater than for the same month of 2004. IISI expects the 2005 figure to reach about 1.1 billion tons when finalized.

China produced 317.7 million metric tons of steel during the period, an increase of more than 25 percent from the same period in 2004.

North American production has declined, however, with the U.S. down by about 5.9 percent and Canadadown by 4.9 percent.

Italy is the only large European nation to post a production increase during the period, with a gain of 2.6 percent.

Japan made 103 million metric tons from January through November, just 0.2 percent higher than for the same period in 2004, while India produced 34.5 million tons--up some 16.6 percent from the 2004 figure.

Excluding China, world crude steel production is actually 0.9 percent lower than for the same period of 2004.

The author is editor of Recycling Today and can be contacted at [e-mail].