Yellow flag: after several years of scrap markets gaining at stock car speed, the brake pedal may finally be tapped in late 2006.

Demolition contractors, mixed C&D recyclers and crusher operators who generate steel rebar scrap are all familiar with the healthy markets for scrap metal that have been in place for the past two years.

But the global commodities markets that underlie the prices being paid for scrap steel, copper and aluminum can be fickle beasts. Counting on prices being stable for another 12, six or even three months is a dangerous exercise.

Knowing what will happen in advance is just as uncertain. However, seeking out a few opinions is never a bad thing, and the recently held Institute of Scrap Recycling Industries Inc. (ISRI) Commodity Forum allowed some opinions to be aired.

The annual event was held in mid-September this year at the Hyatt Regency O'Hare in Rosemont, Ill.

IRON ENDURES

The markets for ferrous scrap should hold up fairly well throughout the next several quarters, according to speakers at the ISRI event. Four speakers looked at some of the key economic barometers for the steel industry, and, despite some concerns about macro-economic conditions, their overall opinion was that the steel and ferrous scrap industries should hold up fairly well.

Opening the meeting, John Tulloch, executive vice president for IPSCO Steel, Lisle, Ill., noted that growth should be positive in all major global economies for next year, though overall growth will moderate from this year. The key growth areas will be China, India, the former Soviet countries, Eastern Europe and South America, Tulloch said.

Adding to his overall upbeat outlook, Tulloch said various end markets, for the most part, should be positive. The one difficult segment will likely be the automotive market, where he sees difficult conditions, especially for North American auto producers.

As for other markets, residential and commercial construction should be fairly strong, while energy, machinery and equipment and off-road transportation should have a positive influence on the industry, Tulloch said.

Along with steady markets going forward, he also said he saw continued U.S. steel industry restructuring, with more high-profile mergers being announced during the next several years.

Robert Hunter with Midrex Technologies, Charlotte, N.C., noted that direct reduced iron has shown strong growth. As electric are furnaces run at full capacity, less scrap is available, resulting in greater demand for the substitute materials Midrex makes.

On the European side, Peter Mathews with Black Country Metals, a United Kingdom-based scrap metal company, said there appears to be some foundry activity in Eastern Europe, with a number of Western European countries investing money in either building or expanding foundry capacity in Eastern Europe.

Concluding the ferrous roundtable, Wim van Acker with Roland Berger Strategy Consultants LLC, Munich, Germany, said he expected ferrous scrap markets to be volatile, but fairly strong. "The steel industry is pretty healthy. We also are optimistic about the scrap business," van Acker said. "Global scrap demand has grown 5.6 percent since 1999; U.S. demand has grown 2.7 percent," van Acker noted. He concluded, "The steel industry is still in good shape. The scrap industry will continue to share in steel's success. Scrap processors can take proactive steps to increase their competitiveness and improve their market position."

COPPER CONCERNS

Speculation on the future of the copper market drew a lot of attention at the ISRI event. Several industry analysts who spoke said they saw growing signs of a decline in price for the commodity. And, depending on the speaker, the decline could be quite significant and could come sooner rather than later.

David Threlkeld with Resolved Inc., a firm based in Scottsdale, Ariz., that trades in nonferrous metals, said, "We are enjoying unprecedented prices. If these aren't legitimate prices, we will pay for it down the [road]."

Threlkeld acknowledged that funds are playing a much greater role in the market. "No one knows the volume of the market right now," he said.

As a cautionary note, Threlkeld said that collapses generally happen in September and October. "We could be leaning toward a situation where we could get fund liquidation. We have a market now that is close to double in price in the last year."

In further support of his bearish outlook, Threlkeld pointed out that copper consumers have already been using other, substitute materials if they can.

As much as a gloomy forecast as Threlkeld presented, another speaker, Megan Hovey-Carpenter with Rosenthal Collins Group LLC of Chicago, said that while there may be some retrenching, "I would expect we remain a bit stronger, with some softening next year, although not too bad."

Warren Gelman with Kataman Metals of St. Louis noted that during the past four years, copper markets have moved from $0.70 to $3.40. "We believe that markets are tremendously overpriced," he said. "We don't know when the market will drop. We are seeing a slowdown in business, a slowdown in housing business."

In supporting his outlook, Gelman said that some consumers are sharply cutting their monthly orders. "China has taken a back seat," he said. As a result of these trends, copper has flooded the domestic market.

Daniel Schwab with Philadelphia's Metallic Recovery Group acknowledged the volatility in the market. He said that as a protection against sharp moves, Metallic Recovery Group is keeping its speculative positions to a minimum. "My big concern is, are we going to get paid. This is too much risk in the market right now. Keep it on a short leash."

While the short-term fluctuations in copper are cause for concern, Hovey-Carpenter noted, "Copper is still a good investment."

ALUMINUM STAYS BRIGHT

Although the overall sense for copper was bearish, analysts provided a more upbeat outlook for aluminum.

During the Aluminum commodity discussion, Lloyd O'Carroll with Davenport & Co. LLC, an investment and research firm based in Richmond, Va., noted that China is the driving force for the aluminum market. He said that consumption in China and Europe is strong and production is rising only minimally.

Andrew Stein with TST Inc., Fontana, Calif., agreed that China warrants constant attention. "Everyone is a transportation cost away from China," he said. "As that country increases its consumption, it will be something to watch," Stein added.

While aluminum markets have held up fairly well, some dark clouds were forming on the horizon. O'Carroll noted high energy prices, higher borrowing costs and a slowdown in the housing market as areas of concern for aluminum. While recognizing these as potential negatives for aluminum, he said he didn't expect to see a recession, "although people will feel it."

O'Carroll said that while hedge funds are playing a greater role in the market, "These guys are technically driven. They are pure momentum buyers. They don't change the price, but exacerbate volatility."

As to the issues that dealer of scrap aluminum are dealing with, Alan Alpert with Alpert and Alpert, Los Angeles, said that a value-added tax on exports could have a great impact on the demand for scrap.

Finally, with consolidation taking hold of many other segments of the metals and mineral industry, all the speakers said they felt that increased consolidation would take place in the aluminum industry, with many of the top players strengthening their businesses with downstream acquisitions.

The author is senior editor and internet editor of Construction & Demolition Recycling and can be reached at [e-mail].