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s far back as the end of 2001 the general mood in the scrap metal sector was on the brink (and sometimes beyond it) of a genuine panic. The export price in the Rotterdam FOB terms was persistently staying at the level of $70 to $80 a ton HMS1&2. Practically, it was the survival borderline for European scrap metal reprocessing companies because of a rather high prime cost of the reprocessing process stage (about $30 a ton). Optimistic forecasts, if there were any, were based mostly on the principle “it cannot be this bad for this long”.
The sharp improvement of conditions in the Russian and world steel industries in the spring and summer of 2002 caught analysts off guard. "The Big Metallurgy" started to stir up: first, scrap metal yards were freed from their overstock and a little later prices for metal products began rising more and more. Right after that the scrap metal segment of the industry also revived. And it did not only revive. Like a prisoner, whose fetters were removed, the world market of scrap metal shook itself up as though it was not completely sure of the sudden luck and by the summer of 2002 it reached the 1997/98 price level. Then, in the 2002/03 winter, having restraining shackles no longer, the market made a rush jumping up 1.5 times in some three to four months.
The further development of events was rather reminiscent of that prisoner’s panic flight: the market zigzagged regardless of everything. For a long time it did not experience either such ups and downs or peak prices for scrap metal. In December 2003 prices soared to the 1948 maximum level.
It seems that right now it is about time to take a break, to look back, to assess recent events and try to understand what expects us in the nearest future.
First, it is necessary to look at the world market. One of the main and the most obvious reasons for the growth of the scrap metal market during the given period was, of course, the sharp change of the steel production curve that fell precisely on 2002. If in the previous seven years an average annual increment of steel production amounted to 17.8 million tons, i.e. a little more than 2% year-on-year, then, between 2002 and 2004 it already averaged 66.5 million tons or almost 7%. However, the growth of demand for secondary ferrous metals explains the general trend towards the price increase but it in no way reflects sharp fluctuations of prices (especially in 2004), when in one or three weeks at most prices could fall down by 20, 30 and more per cent and, then, grow up again this fast. It is noteworthy: this was happening while there was a generally stable buoyant trend!
So, what really happened in the world by the end of 2003? If one is to judge things by the growth of steel production, then, even with China’s low level of scrap metal consumption (as is known, this country has made a major contribution to the world’s steel production) taken into account, it turns out that demand for scrap metal should have gone up by no less than 25 million tons as against the average level in the period between 1999 and 2001. At the same time, the apparent volume of the world scrap metal trade increased 10 to 11 million tons only. Thus, before the end of 2003 over half of the world demand increment was satisfied through domestic reserves, i.e. thanks to the scrap metal picking in countries with a strong metallurgical industry. Besides, over two thirds of those mentioned 10 million tons of the net trade increment were provided for by the growth of the scrap metal export from just one country: the United States.
The growth of the scrap metal picking in developed metallurgical countries was explained by the fact that already in the second half of 2001 and in 2002 world prices for scrap metal were breaking away, through smooth growth, from the critical point determined by the average prime cost of scrap metal reprocessing. If in 1999 scrap metal reprocessing companies in Western Europe often refused to purchase costly or difficult-to-reprocess scrap metal limiting themselves to acquiring the cheapest or State-subsidized raw materials, such as, for example, ELV (end-of-life vehicles), then, in 2002 the situation was radically different. Also, during those years there was a qualitative jump in the scope of the scrap metal picking in the U.S. and in Western Europe, to some extent. By a number of significant indicators in the U.S. (for example, ELV, scrap of large household equipment, etc.) the level of the second-round use of metal reached 90% to 100% raising the total level of using retiring metal to 74% (!) and that just recently seemed inconceivable.
In 2004 the volume of the world scrap metal trade increased again. However – and it is noteworthy – the U.S. added only 1.5 to 2 million tons of the net export, i.e. less than 3% of the total scrap metal picking volume in the U.S. But even such a minuscule increment caused an obvious nervousness among American steelmakers that tried to limit export of scrap metal with the help of legislators.
In 2004 the place of the U.S. was taken up by Russia with its record, almost 6 million ton increment of the net export (15.5% of the country’s total scrap metal picking). Basically, Russia turned out to be the only country, which could add up perceptible volumes of the net export last year (10% to the volume of the world scrap metal trade between 1994 and 1999!). What is more, it took place against the background of simply fabulous conditions on the world market.
The increase of prices as well as demand on Russia’s scrap metal market in the last two years led to the qualitative change of the situation. There was more scrap steel picking or, to be more precise, almost two times more. There were three main reasons for that.
The first one was the extension of the supply geography. With a new price level scrap metal picking companies got more benefits from getting to places where they had never been before. For example, to the north of the Tyumen region, where the principal activity is linked to production of oil and gas. During all this time we were watching how the whole networks of accumulating bases were emerging and developing in such regions of Siberia, where even a railroad is not available. The subsequent transportation of scrap metal was done either by motor vehicles that brought it to the nearest railroad station or by water transport during the navigation season.
Another reason was the growth in the number of market participants, especially in Siberia and the Far East. In some regions a number of market participants increased several times. Accordingly, rates of the scrap metal picking also went up.
The third factor of no less importance was the qualitative improvement of the country’s system of picking and reprocessing scrap metal. Favorable conditions in combination with a growing competition resulted in a general management improvement. Sufficiently large investments were made in new equipment and technical re-equipment, companies and particularly the steel ones hired qualified managers, who ensured the efficiency growth at scrap metal reprocessing enterprises. Here is the example from the author’s personal experience. After forming a qualitatively new management within the Service of secondary metal supplies at the Trading House of EvrazHolding Ltd. the Holding-owned enterprises of secondary metals in the Kemerovo region and Krasnoyarsk Territory got good results literally in six months. The volume of shipments by these enterprises increased as much as three to four times. Later, less than in a year, after investing over $2 million these enterprises raised the achieved level by 30% to 40% more, stopped being hopelessly nonproductive and became stably profitable. Invested funds were recouped in less than nine months.
By our estimates, in 2004 the scrap metal picking in Russia exceeded 31 million tons without taking into account scrap metal that was produced directly at metallurgical enterprises. By the way, the volume of the latter (by our estimates) was equal or even exceeded somewhat the level of scrap production.
All this was the reason for an euphoric mood among both scrap metal picking and reprocessing companies ("prices grew, they are growing and they will keep growing") as well as among steelmakers ("there is enough scrap metal and there will be enough of it: there is no reason to worry about anything, except prices").
But, as they say, there is always a fly in the ointment.
The first thing that draws attention is the reduction of the scrap metal market elasticity that is well shown by the diagram. If in 2003 the average market price increased 1.44 times and that led to the growth of the scrap metal picking by 1.26 times, in 2004 the situation was somewhat different. Prices went up already by 2.35 times (by 2002), while the scrap metal picking rose by 1.7 times. In other words, there was an evident trend towards abundance. Our analysis shows that the market’s reaction to a further hypothetical rise in prices will be rather sluggish. With the growth of world prices by $100 a ton – and that is unlikely – the calculated increment of the scrap metal picking amounts to about 15% only.
Of no less importance is the ratio between the scrap metal picking and scrap metal production. By different estimates, the scrap metal production in Russia fluctuates from 28 to 32 million tons year-on-year. As it has already been mentioned, last year the volume of the scrap metal picking was about equal to the volume of the scrap metal production or exceeded it by no more than 10%. But it is about the same as people’s joke about "the average temperature in the hospital": "three patients have died, while nine persons have the temperature of 420; this means that the average temperature equals 36.60". There are regions, where the volume of the scrap metal picking is considerably lower than the level of the scrap metal production. At the same time, for example, in Siberia and the Far East, the scrap metal picking volume has exceeded by almost two times (Sic!) the volume of the scrap metal production. And the similar situation is not limited to Siberia only. If one is to ponder over it, then on the whole, it becomes obvious that there is nothing surprising about it: our country is gigantic indeed. However, the reality is that for the first time accessible resources of scrap metal in the considerable part of the Russian territory have started to decrease and to decrease intensely. In a word, all of a sudden, scary guesses about possible exhaustion of scrap metal reserves have got a rather real nature.
One more factor has to be mentioned as well (whether it is positive or negative depends on how to look at it). This is a planned growth of the Russian steel industry’s need for scrap metal in a quite foreseeable future. Now it is kind of hard to find a more or less large company that is not implementing or is not planning to implement reconstruction of production capacities in the nearest future. As a rule, such plans provide for the increased use of scrap metal. Besides, it is known that there are several projects of building mini-plants with electric furnaces, which will also use scrap metal as their basic raw material. Thus, in the nearest two to three years the steel industry’s need for scrap metal will go up by no less than 4 to 5 million tons a year.
So, let us sum it up.
Let me make a few assumptions about the reasons for sharp jumps of the world scrap metal market, which took place last year. From my point of view, the key reason was the extremely low elasticity of the market as a whole. Despite the colossal growth of prices for scrap metal, in real terms only Russia made a contribution to the availability of supply in 2004. The mechanism is simple: the shortage of scrap metal among some consumers (or regions) – the absence of actual additional offer (from yards, in the best case) – the sharp growth of prices with no additional supplies – the slowdown at the level of $300 to $310 C&F by, say, Taiwan or South Korea – the fallback to the level between $260 and $280. Obviously, the level of $300 to $310 for spot supplies is the one of tough resistance that is determined by the level of sales prices for rolled products and the prime cost of the reprocessing process stage.
In 2005 the situation will get even harder. Russia will not evidently add much and no other country will. Most likely, this will lead to further sharp fluctuations of prices. However, it is possible that compensatory mechanisms (alternative kinds of raw materials as well as production volumes can serve as market regulators) will come into effect. In this case price fluctuations can begin to subside. Accordingly, an average level of prices will hardly exceed the level of the second half of 2004 to any significant extent. Growth of prices for scrap metal can be a result of a significant growth of prices for metal products and that in the current situation seems to be unlikely. The market will be more elastic for Russian steelmakers: the export volume will act as kind of reserves, from which it will be possible to get additional supplies. Nevertheless, dynamics of prices will come close to the world one.


Ðèñ. 1. Äèíàìèêà ìèðîâûõ öåí íà ìåòàëëîëîì â 2002 – íà÷àëå 2003 ãã., äîëë./ò
Dynamics of world prices for scrap metal in 2002 to early 2003




$ 180
$ 160
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09.01.2002 09.02.2002 09.03.2002 09.04.2002 09.05.2002 09.06.2002 09.07.2002 09.08.2002 09.09.2002 09.10.2002 09.11.2002 09.12.2002 09.01.2003 09.02.2003 09.03.2003


World production of steel*, thousand tons
*data by IISI

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Relative growth of of prices and volumes of scrap metal picking in 2003 to 2004 (2002=1)

2003
2004

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Average prices on world market throughout Russia in Siberia and Far East Volumes of scrap metal picking