The following is a co-post, researched and written by Paul Kedrosky and Gregor Macdonald.
Schnitzer Steel of Portland, Oregon reported record revenues earlier this month. No surprise. The recycled-metal giant, which has roots going back over 100 years to the Alaska Junk Company, is uniquely positioned for the ongoing commodity supercycle. With iron ore, copper, and a selection of other metals now exceeding their 2008 price highs, the demand for salvaged metal is soaring. 2011, so far, pressages more of the same as the worst copper deficit since 2004 is set to unfold over the next two years. With production from mining under pressure, industry will have to turn increasingly to scrap.
The world of salvage and scrap is filled with memorable images. In Sebastaio Salgado’s classic series of photographs, human shipbreakers attack hulks on the warm beaches of Chittagong, Bangladesh. A load of chopped-up American junk from tools to kitchen blenders, resembling a dirt pile, heads out to sea from the port of Los Angeles. Upon arriving in Guangdong Province it will be transformed into appliances for export, starting the cycle all over again. There is even the legendary portrait of a central banker (Alan Greenspan), sitting in his bathtub and scanning the latest price reports for No. 1 Heavy Melt Steel Scrap.
Scrap is an essential part of industrial civilization. We buy stuff; we scrap stuff. As Robin Nagle, the New York City Department of Sanitation’s anthropologist-in-residence, recently said, “Every single thing you see is future trash. Everything.” The question, in other words, isn’t what is scrap – everything is – but what we do with it all, and what that says about us. Do we toss it into landfills? Do we recycle it? Do we send it others, or do we do it ourselves?
We can get part of the answer from the illegal drug market. Of all the parts of the economy touched by scrap, among the most surprisingly instructive is this one. Why? Because as any narcotics officer or addiction counselor will tell you, a primary source of capital for the drug addict is found by rummaging (or stealing) discarded metal. The word junkie actually goes back to the early years of the 20th century, when heroin addicts turned to scrap to finance their habits.
In John Seabrook’s absorbing 2008 New Yorker essay, American Scrap, he references the connection between metal-theft and drug dealing operations, noting that:
….hot spots of crystal meth abuse—Hawaii, the Southwest, San Diego, Oregon, and increasingly the rural Midwest and South—map to hot spots of metal theft.” One of the conditions of a meth high is extreme focus, which is just what you need to unravel lengths of copper wire from a tightly corded braid of other metals. Not only does meth give you the patience to do the job but the reward—money for more meth—is right there in the metal.
Others have learned from the junkies’ focus. In 2008 during the last bull market in global metal and steel prices, the FBI produced a report titled: Copper Theft Threatens U.S. Critical Infrastructure. Don’t laugh. While junkies continue to strip residential housing wire of its insulation in order to string together a few pounds of copper, illicit hauls today are much more sophisticated, often weighed by the ton. Guardrails on highways, bronze sculpture, streetlights, and new buildings under construction are all fair game to the modern-day scrapper. Many recycling drop-offs around the U.S. display tattered notices that they don’t accept granite headstones – to dissuade some of the more ghoulish scrappers. Around Christmas 2010, two tons of metal in the form of old grader blades were stolen from a construction company in Vermont. Last summer, a thief used a forklift to steal other forklifts in the Portland, Oregon area and sold those–as scrap.
At the University of Indianapolis, researchers Kevin Whiteacre & Raeann Howes have been tracking insurance claims for metal theft. Unsurprisingly, their work shows that metal theft activity rises with prices, writing: “The original 2009 National Insurance Crime Bureau (NICB) report, using some of these same data, found that the number of metal theft claims nationally rose steadily from 2006 until the middle of 2008, then dropped steeply after July 2008. This trend is consistent with general agreement about the rise in metal thefts during that time and the subsequent drop in the summer of 2008.” From their 2009 report, Research Brief #2 – Scrap Yards and Metal Theft Insurance Claims in 51 U.S. Cities, comes the following table.
But while rising prices have encouraged more supply from scrap, supply from mining has been under renewed pressure this past decade. The longer-term picture for copper shows that while supply growth rates ran at nearly 3.00% per year from 1980 to 1999, those growth rates have fallen below 2.00% from 2000-2009. This, as copper has broken out to an entirely new price regime. | see: Global Copper Production in Metric Tons 1980 – 2009.
As metals traders know–that is, traders in legal metals markets–most commodity indexes have recovered all their losses since the 2008/2009 collapse. Copper, regarded as unsustainable at 4 dollars a pound in 2008, is now $4.40 a pound. The S&P Industrial Metals Index, which crested above 500.00 in early 2008, has just made its way back to 480.00. But more meaningful is that this index spent all of 2010 above 400.00. The Chinese domestic stimulus package of 2009, in particular, which emphasized billions of dollars for new subways systems, freight-lines, and high-speed rail flowed through to global iron-ore and coking coal markets with force, in 2010. Little has changed, in other words, with respect to its appetite for metals as the country continues to frantic and unprecedented build-out.
Little has changed in the channels by which metals make it to China either. Most comes through official channels, the kinds tracked by London analysts and seedy newsletter-sellers alike. But underneath all these flows is an important reversal. We are now the East’s shipwreckers, mindlessly tearing apart our aging infrastructure to generate cashflow from these emerging economies. This reversal of flows, and reversal of roles, is hugely important, and deeply unsettling. As New York’s Nagle says, scrap, by its visibility and ubiquity has been “invisibilized.” By making it visible again, however, we see that just as growth rates have regressed between developed and emerging markets, scrap has reversed its flow also–from West to East.
-Paul Kedrosky and Gregor Macdonald