Top of the world: ferrous markets have sustained their strength for three years, but anticipation of a sudden drop lingers.

The success of global scrap markets has not been a secret for the past few years. Mainstream media outlets (or mainstream business media outlets, in any event) have reported on escalating metals prices and some of the causes and effects.

Whether reporting on the high cost of basic materials or the surge in metals thievery worldwide, scrap metal has gained attention.

While steel--relatively low in value compared to copper--may not be targeted by thieves as much as the red metals are, it is nonetheless a hot commodity enjoying boom times.

BUILDING BOOM. A correlation has been soundly established, in many minds, among pricing for ferrous scrap and the melting capacity rate at steel mills, as well as the demand for mill products. In short, as goes the steel industry, so goes the ferrous scrap industry.

Production and pricing figures from the past three years seem to back up that correlation, as the global steel industry has raced to keep up with demand from many different corners.

Geographically, Asia (and China in particular) is the poster child for the resurgent steel industry. The economic awakening of China has triggered a building boom--the building of everything, including highways and bridges, office towers, apartment buildings, factories, retail centers and rail networks. If one can think of a steel-intensive building project, chances are there are several such projects underway in any given Chinese city.

The nation's steel production numbers are staggering. According to the International Iron and Steel Institute (IISI), China produced more than 420 million metric tons of steel in 2006. That compares to production of about 100 million tons in 1996, according to IISI figures.

Starting from a base of 100 million tons, China's production has quadrupled in just 11 years--an amount of time that used to be considered fairly short in national economic development terms. (See sidebar "China Calling," p. 52.)

An initial observation would be that if a nation is quadrupling its steel production, it must be flooding the market with exports. But export figures do not necessarily point to that conclusion.

Even the export-heavy Chinese economy is one that is not directly exporting a high percentage of its steel. Granted, much of its steel is made into products that are shipped into North America and other steel-producing nations.

But the balance of Chinas steel is going into its booming infrastructure and building sectors; into new automotive and vehicle production; and into the making of appliances and electronic devices that also serve the nation's growing middle class.

China's mill buyers, even those representing basic oxygen steelmakers who depend on less scrap, have been buying heavily from other nations to feed their furnaces. With so much of China's steel going into construction applications, this represents an end use that does not yield quick turnaround times from new production to obsolescence (scrap).

Thus, as long as China continues to produce large amounts of structural steel for long-term applications, it is likely to have a scrap deficit, many observers believe.

Domestically, a subdued housing market may be the first thought that comes to mind regarding the construction industry in the United States.

But in 2006 and 2007, construction in the commercial, retail and highway segments has not mimicked the housing slowdown. For steelmakers and the ferrous scrap industry that supplies them, this is not a bad tradeoff, as non-residential and infrastructure projects tend to be more steel-intensive. (See sidebar "Building with Steel," p. 54.)

ENGINE DRIVEN. The short-term health of another major steel consuming market, the automotive sector, is less certain.

The good news is that Americans and citizens of other nations continue to buy cars. For steelmakers and scrap suppliers, the less pleasant news might be that the American love affair with heavyweight SUVs and large pickup trucks may well be fading.

The inverse relationship between skyrocketing gasoline prices and the sale of large SUVs and pickups is hard to miss.

In Louisville, Ky., where Ford Explorers and some F-Series trucks are produced, the sales figures are tracked by the staff of the Courier-Journal in that city.

According to an April 4 news item from that paper, "Sales of Louisville-built Ford Explorers and F-Series trucks continued to lag in March [of 2007]."

That month's sales figures are part of a longer trend, according to the Courier-Journal. "Explorer sport utility vehicle sales fell 25 percent from a year earlier, to 12,876. F-Series truck sales, which include the Super Duty and the smaller F-150, were off 15 percent at 71,481. The percentage declines are similar to those of other recent months."

Some of the fleeing Explorer customers are turning to Ford's "crossover" vehicle, the Edge, which is built on an automobile platform. According to the Courier-Journal, "Ford's new Edge model, introduced in December, sold nearly 11,000 units in March, a 37 percent increase over February. Year-to-date the Edge has achieved 70 percent of Explorer sales."

By name plate, Ford, GM and to some extent DaimlerChrysler have been hurt the most in the shift away from larger vehicles.

The geographic implications of this, in general, serve to favor the Southern United States vs. the Great Lakes region, a manufacturing trend that hardly requires an additional push. (See "Due South" in the March 2006 issue of Recycling Today, also available from www.RecyclingToday.com.)

Perhaps of more concern to domestic steelmakers and their scrap suppliers is that smaller cars are increasingly making international voyages.

An Associated Press report in April noted that Japanese automakers are expanding their plant capacity at a time when demographics in Japan itself do not indicate that more cars will be purchased domestically.

The most recent figures at press time available from the Japanese Automobile Manufacturers Association (JAMA) show that Japanese factories exported nearly 520,000 passenger cars in February of 2007. This was an increase of more than 54,000 units (11.7 percent) compared to the 465,000 cars shipped out in February of 2006. (The figures are for cars shipped globally, not just to the U.S. market.)

Auto industry watchers have been speculating about the feasibility of cars assembled in China being shipped to North America. Current barriers to that include the need for China to serve its own market first as well as the lack of any firm dealership arrangements at this point.

Those looking for a new source of imported vehicle concerns, however, are pointing to South Korea in light of the recent trade pact between the United States and that nation.

The United States, however, is already the biggest overseas market for Korean automakers, absorbing some 700,000 Hyundals and KIAs in 2006.

The tariffs being removed by the trade agreement run both ways, but analysts see South Korean luxury shoppers gravitating toward upscale Japanese and German-made cars rather than those made by U.S. manufacturers. Current figures reflect that, according to a Korean automotive trade association: Only 11 percent of imported vehicles last year were made in the U.S., compared to 59 percent made in Europe.

For steelmakers who serve the domestic auto industry, the price of oil will be closely watched, as will American automotive buying habits if the prices stay aloft.

HARD TO ARGUE. Despite any concerns about fewer houses or smaller cars here in the United States, the market has spoken clearly regarding global demand for ferrous scrap.

The first quarter of 2007 witnessed some of the highest prices in ferrous scrap history--in actual or inflation-adjusted dollars.

For the last several months, processors and shippers who have been able to get material flowing into their yards have enjoyed some of the best conditions in recent memory.

The author is editor in chief of the Recycling Today Media Group and can be contacted at [e-mail].

BUILDING WITH STEEL

The declining homebuilding market has gained all the headlines, but commercial contractors stayed busy in 2006.

Year-end figures show that the more steel-intensive and infrastructure sectors enjoyed healthy conditions in 2006

Remarks Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction, Lexington, Mass., "Last year featured growth for such non-residential structure types as hotels, offices and schools, combined with a brisk pace for the public works sector. That increased amount of construction was supported by positive market fundamentals, such as declining vacancies and rising rents, along with greater funding coming from the federal and state governments."

In the infrastructure category for the full year 2006, construction contract values climbed 19 percent to $121.4 billion. Transportation public works showed healthy growth, with highway spending up 14 percent and bridge spending up 15 percent. "Highway and bridge construction was helped in 2006 by the enhanced funding contained in the current federal transportation bill; at the same time, further expansion this year will depend on Congress quickly passing the fiscal 2007 appropriations for transportation work," Murray comments.

The top five states for highway and bridge construction in 2006 were Texas, California, Florida, Georgia and Illinois. Electric utility construction in 2006 surged 90 percent, bringing a four-year decline to an end. Greater contracting was present across a range of power plant types (fossil-fuel, natural gas, wind and solar), as well as transmission line projects. The top five states for electric utility construction in 2006 were Texas, Wisconsin, Colorado, Nevada and Pennsylvania.

U.S. CONSTRUCTION CONTRACT VALUES

                     Jan-Dec. 2006    Jan-Dec. 2005   % Change

Residential         $337.8 billion   $382.1 billion     -12%
Non-Resid. Const.   $203.8 billion   $179.4 billion     +14%
Infrastructure      $121.4 billion   $102.0 billion     +19%

TOTAL               $663.0 billion   $663.5 billion       0%

Source: McGraw-Hill Construction

CHINA CALLING

In 1996, Chinese steelmakers surpassed the 100 million year mark for the first time. The annual figure that year put million tons ahead of the United States, with which it had been comparatively even in 1996.

Since then, comparisons have been increasingly apples-to-oranges. While steelmakers in the United States have been fluctuating between producing 90 million and 99 million metric tons per year, China's annual figure has exploded.

If 2006 figures from the International Iron and Steel Institute are correct, China--starting from a very large base in 1996--has subsequently quadrupled its annual steel production.

CHINA'S PRODUCTION
OF RAW STEEL
(METRIC TONS)

'96   101,000,000
'97   109,000,000
'98   106,000,000
'99   124,000,000
'00   128,000,000
'01   152,000,000
'02   182,000,000
'03   222,000,000
'04   272,000,000
'05   349,000,000
'06   420,000,000

Note: Table made from bar graph.

Sources: International Iron and Steel Institute; U.S. Geological
Survey.