Drop In Chinese Demand Melts Scrap Metal Market

Scrap metal collectors in China i i

hide captionChinese workers try to correct a load of scrap metal that shifted during transit in Shanghai.

Mark Ralston/AFP/Getty Images
Scrap metal collectors in China

Chinese workers try to correct a load of scrap metal that shifted during transit in Shanghai.

Mark Ralston/AFP/Getty Images

Just months ago, scrap metal was in such high demand that thieves around the world were pulling up manhole covers, fire hydrants and even monuments to the dead to sell them. Driven by China's insatiable appetite, prices for scrap metal had skyrocketed. But now, the scrap metal industry has been hit hard by the global financial crisis — and scrap yards themselves could be facing the scrap heap.

Alex Antikides first noticed something was up in May. He runs Pan Global Resources, a company that processes and exports ferrous scrap. All of a sudden, his customers stopped buying — saying they had enough stock and would wait a few weeks before coming back into the market. But weeks turned into months, and the customers never came back.

"The market finally never recovered and, in fact, took a nosedive, a bloodbath," Antikides says. "It went from $750 to about $350, and now we're about $150 a ton — most of us are still sitting on stocks of $600 a ton, which we cannot shift properly at the moment."

Booming Demand Over

Crisis almost seems an understatement for what has been happening in the scrap metal market. Some scrap prices have tumbled 80 percent in four months. While the product may be less well-known than stocks or real estate, the story is a familiar one of giddy, gravity-defying markets and speculation on a grand scale that delivered extraordinary profits.

"We believed it would never stop," Antikides says. "We were buying, and every time we bought, it went up. And we were happy."

That boom was largely fueled by China. China's sizzling economic growth meant it accounted for 45 percent of the scrap metal market, turning scrap into steel for construction. Chinese demand pushed up all commodities — its investment in railways and housing helped quadruple prices of copper and nickel between 2001 and 2007. Now, those good times are over.

Market Meltdown

"It's been very bad for us," says Shakur Adel-Al-Essa, who works for a Kuwaiti metal and recycling company. "The meltdown — customers walking away — that's been across the region."

He describes how buyers are refusing to honor contracts signed when the market was high. Some are walking away, forfeiting deposits. Others are bargaining down prices, knowing the sellers have no choice. Many buyers can't get financing from banks to close the deals, and, in turn, they're passing on these financial problems to the scrap metal dealers. Many of them didn't hedge their transactions and are sitting on potential losses of tens of millions of dollars. And so the crisis expands and reverberates down the chain.

"I've forward-sold around 15,000 tons of material, and only 3,000 tons went through," Adel-Al-Essa says. "The rest were either canceled or asked for discounts — or asked for discounts and changed payment terms."

The other 12,000 tons, Adel-Al-Essa says, are either in port or heading back at huge losses to him.

"I have to sell them at current prices today. That's the nature of the business," he says.

So tens of thousands of tons of imported scrap metal unloaded from boats and rejected by buyers are now sitting in limbo in ports around the world, especially in China. With broken contracts becoming a norm, trust between foreign sellers and Chinese buyers is at an all-time low.

'Survival Of The Fittest'

Wei Jiahong, the deputy chairman of China National Resources Recycling Association, says many Chinese buyers are breaking their contracts because they are on the brink of collapse themselves.

"Lots of our factories have shut down," Wei says. "For example, in the copper industry, 1 in 3 factories now have big problems. Many small companies won't be able to make it. It's really survival of the fittest."

Antikides says the scrap metal market is an important indicator of the overall health of the economy and has an impact on the consumer.

"When the steel industry is going down — which is the heart, the artery of the economy because steel goes into cars ... in all sorts of consumer goods — when the demand for that stops, then people have to start worrying," he says. "That means the boom is over."

With the announcement of China's massive stimulus package, some hoped demand for metals would bounce back. But analysts in China are gloomy, saying the plan will just accelerate projects already in the works. The scrap industry, like so many others, is in for a long, hard winter. And, at this point, few are willing to predict what it will look like when it emerges.

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