The local Italian scrap market was in a poor state in the first seven months of 2009. Everything was bad; both the production and financial sides were negative for scrap companies. Into the bargain, the situation appeared even worse than it actually was, as 2008 has been a magic year with several records for prices and volumes in comparison with 2007.
However, at the end of last year, we were able to see that business was declining, even if it was quite impossible to forecast what was going to happen.
The crisis reached such a level especially since market players were in panic mode and sometimes behaved in an erratic way.
We can summarize the reasons behind the crisis in three points:
1. The low rate of manufacturing reduced new scrap availability by 50 percent, so the usual numbers of players were competing to buy half of the usual quantity. Manufacturing firms started to hike their scrap price, trying to balance the higher price with their lower core business revenue. Another problem was seen in the availability of demolition scrap, which was reduced since contractor companies (for big industrial demolition projects) did not want to sell scrap at low prices, since they had made their economic calculations some time before when scrap prices were higher.
2. Price volatility was even worse since there was lot of pressure from steel producers who tried to obtain even lower purchase prices. This situation pushed some scrap sellers to evaluate the export business, and, since Italy is a net scrap importer, it is easy to understand the fragility of this situation.
3. Lower tonnages and lower prices generated a critical financing situation for scrap companies which had made lot of investments in order to conform with the latest environmental laws.
In July the first signs of recovery were seen, pushing up production levels and, consequently, scrap demand. Since scrap availability was not good, some mills were worried and started to buy scrap (discarded production) from their own customers, bypassing the scrap yards. This is considered a bad way to operate and a non-ethical way of doing business, and is likely to give rise to bad relationships in the medium/long term.
As regards the future, it is not possible to say that difficulties will come to an end, but it is necessary to be able to view recovery signals like the improvements in the stock exchange markets; better indexes, thus greater raw material demand. A more optimistic vision is needed, and we have to view the crisis as a significant experience rather than as a threat.
Today’s markets change rapidly and players have to be fast and flexible. It is also important to weigh both bad and good news in the same way, in order to avoid panic situations.