“Markets have way to go before they beat the volatility by all means”
William J. Schmiedel, president of Sims Metal Management, the global leader of metals recycling shared with us his views and thoughts about today and the future of the steel and scrap markets worldwide.
Can you tell us about SIMS and what has changed after the merger with Metal Management?
The change was basically moving Metal Management from a more of a domestic oriented shipper to an export oriented shipper.
Before the merger, Metal Management was an exporter in two locations. Sims was much more export oriented compared to Metal Management at that time. Maybe half of their business was domestic. Sims was working 90 percent export and 10 percent domestic. So we have made many synergies especially in New York, and we have revamped a lot of their domestic activities so we now handle for export, what they used to handle domestic. That was the biggest change.
Today, for the combined company we can talk about a 20 percent domestic and an 80 percent export in terms of shipments.
What is the share of your export sales to the total US exports roughly?
US exports this year would be something around 19 million tons for export and Sims MM will do about somewhere between 7-8 million.
What are your major trading routes in exports?
Turkey is our biggest market, after that Korea, then China and then all through South East Asia. For our exports, I am also including our joint venture with The Adams Family. This joint venture is called SA Recycling.
Can you rate your sales volumes to the Turkish market, China and the Far East or other regions?
Turkish market is about 1,5 million mts for us this year. Korea will be about 1 million, China will be lower this year about 500.000 mts.
Last year Turkey was 1,4 million, Korea was 1,2 million, China was about 700.000 mts. We do quite a bit in Vietnam and Malaysia too. Malaysia is about half a million mts. We ship everywhere including the regions Indonesia, Thailand, India, Saudi Arabia, Egypt. A lot of material goes from UK to Spain.
Are you doing any container shipments?
We ship containerized through the SA Recycling operations from Los Angeles to the Far East. No containerized scrap really goes to the Mediterannean. Beause the freight rate are not condusive right now.
Containerized scrap is driven by the necessity of the container lines to get the containers back into a producing market like China or Korea. Without scrap, the containers go back empty. Some grain or other bulk commodities go out by container, but not enough so the lower scrap rates could be more than competitive with bulk ocean freight rates. Some cases they are the same, some cases they are the less. It is cheaper to ship by container out of Los Angeles to many South East Asian ports than it is to a bulk ship.
Container shipments can have certain logistical advantages but everything is driven by economics. If the steel mills are set up at port then containers are easier to handle their raw material needs. It also takes less money for the buyers to put out at any given time as they don't have to buy 40.000 mts at once, where by container they can buy 5.000 mts. So for small mills in Vietnam, Indonesia, or Thailad it is a good way to buy. It takes less market risk to buy in smaller quantities so that they can average out the bumps in the market.
But it is not condusive in Turkey. Mills are bigger, they need more material so they buy all the time. They average out in a different way.
Which direction do you expect the scrap prices in the US domestic market to go next?
For October the US prices are falling down by about 20-30$/mt. That will be a temporary fall, in November it will either be the same or go back up because in the US we have a severe winter at least in half of the country. They have to anticipate the scrap flow will decrease as we get closer to December-January-February. So generally the market will trade down in October which is normal, then probably either November or December it will start to pick back up.
How is the demand in the US market right now?
Not so strong but the mills have recovered back up to around a 75 percent operating rate so it's better than a year ago but not anywhere near what it was prior to 2008, however,its basically good, pricess are good, mills are making money but the operating rates are a little bit lower than what we would like to see.
What was the actual reason of the price increases by the beginning of September?
It was really restocking. The mills took various outages during the summer for relining furnaces or just reduce scrap inventories. And then they all came back in at one time. In summer we saw a very interesting situation; July in scrap collection is similar to January and February but for an opposite reason. Weather gets too hot. Unlike Europe where most companies take August off, in the US it is not a merely vacation phenomena, it is rather a weather phenomena. It was severely hot in most of the country in July, much hotter than normal. So scrap flow decreased, and the prices went down. We and our competitiors could not pay as much and that caused a scrap slow down. And then coupled with the weather conditions, we probably went down 30-40 percent in scrap flow for July and August.
So September came with not much scrap around, mills started buying, so prices went back up, a lot of scrap came out and prices now go back down. We will keep living like this for a while as there is a lot of volatility.
Supply is stronger than demand today. Do you think by the end of October Turkish producers will start buying for their winter stocks? Could the scrap prices will get higher by then?
There are some signs that the US economy is getting a little bit better, slowly. Manufacturing goods have gone up, although unemployment is still high, durable good production and constructional projects started to increase. It is a slow recovery period. Demand for steel products should pick up in the fourth quarter too which will help.
Do you think the exchange rates will have any impact on scrap prices?
It certainly makes US scrap more competitive so generally it probably will have a positive impact.
To what extent recent production cuts in China influenced your sales volumes?
It seems the production cuts are for real this time. There are two things going on now. The government is serious about the CO2 emissions so they are shutting down especially the older, more polluting blast furnaces as we all know it takes about 30percent less power to make steel out of an EAF than a BOF and so there could be more concentration on EAF production in China. That will of course increase scrap demand. That coupled with lower production of steel, there should be less steel exports of steel in China, and that too will help all the surrounding steel making community which is good for us.
Even though the Chinese are a big market for us they are not our biggest market. Still steel production out of an EAF in China is very small, maybe at five or six percent so they are not much of a force in importing steel scrap. Korea and all the South East Asia is more important for the scrap exporters in the US or the UK, than China. The most important part for us is to see how much steel gets exported from China.
Scrap imports into China seem to be halved compared to 2009 figures in the Jan-Aug period. Do you expect the buying activity here to accelerate soon, and why?
I don't think there will be too much additional activity in China in this calender year but next year it will change. Next year will be probably a major increase in their ferrous scrap imports . I think the new EAFs starting up mostly in the Shanghai region will make 2011 a good year in terms of exports to China. The percentage of steel made in the EAF in the Chinese market will increase. It will maybe be only a three percent increase. But a three percent increase on 500 million is quite a good quantity.
What will be the remarkable quality of 2011 in terms of scrap according to your opinion?
I think the most remarkable thing will be the same with that of 2010, which is the continued volatility. I have been in this business a long time and most of my career the big change in the market was 10$-20$/mt. Now in a 40-45 day period you have a 100$/mt. This is extremely volatile and I imagine 2011 will be similar. It is a challange all the time.
We are all trying to figure how this risk could be managed. We have the LME billet market but without enough liquidity there yet, its just not big enough to be really usefull for either the steel mills to hedge their products, or scrap people to hedge their products. I think that will be something three to five years from now then maybe that will help us to manage these risk. But for now we are on a trapeze without a net.