Doing Fine

The aluminum market has shown resilience throughout the past several quarters, despite sharp cuts in global aluminum capacity, a struggling U.S. auto industry, a troubled housing market and an uncertain global economy.

Secondary and primary aluminum prices have rallied during the past several months, and many scrap metal recyclers say they feel that prices should hold up fairly well throughout the next several quarters. At the end of 2009, aluminum prices were moving sharply upward, despite, as some industry watchers note, increasing inventories of the metal.

IN THE SHORT TERM

One of the foremost concerns in the secondary aluminum market recently has been the supply shortage. As has been documented throughout most of last year, a slowing economy has resulted in a drop in material generation. That trend has continued into 2010.

Typically, the generation of new supply declines during the first quarter. This year is no different. However, several other factors have added to the softness. Inclement weather through most of the country has further curtailed generation of new supply during the early part of 2010, resulting in scrap metal recyclers scrambling to meet supply needs. This supply tightness is coupled with an overall manufacturing base that is still struggling to find its footing.

“We are not getting a big push for material,” says Rob Carey, president of Metal Conversions, a Mansfield, Ohio-based aluminum recycler. Nevertheless, he reports that his company’s order books are solid and that he doesn’t expect to see any problems with orders in the foreseeable future.

While generation of primary scrap has been a challenge for recyclers, end markets for aluminum have been gradually improving. While still in the early stages of an economic recovery, reports indicate that aluminum has regained steadier footing.

In fact, with greater interest from offshore buyers, the aluminum market has a decidedly bullish atmosphere.

Carey says he sees strong demand for some aluminum grades such as zorba (shredded nonferrous scrap, primarily aluminum) and twitch (fragmentized aluminum scrap from auto shredders that is derived from wet or dry media separation). Strong export interest is driving this demand, with China playing a major role in purchasing some of these grades.

The interest, especially for zorba, has been so great that it is forcing many domestic consumers to match the prices being offered by offshore buyers. Demand for zorba is so strong, some processors are avoiding handling twitch and instead are blending it to ship as zorba.

Andy Wahl of Newell Recycling of Atlanta LLC notes that twitch increased in price by more than $230 per ton in 2009 from November to December because of supply and demand factors. However, Wahl notes in the World Mirror produced by the Bureau of International Recycling (BIR), Brussels, that it is more likely the metal will end up in shredders and be exported as zorba to feed the strong demand seen from China since the start of the 2010.

For domestic recyclers, healthy offshore markets are driving much of the strength in the secondary aluminum market. While China has been more active, India, Pakistan and Western Europe also are entering the secondary market to varying degrees.

Some aluminum dealers and analysts say they suspect that the increase in orders from China at the start of 2010 is in anticipation of the Chinese New Year. However, orders from the country practically cease for several weeks in connection with the holiday.

This sentiment, however, is not universally held. Some nonferrous dealers say buyers and processors have factored in the change in shipments surrounding the Chinese New Year holiday, so it is having less of an impact than it did several years ago.

THE STIMULUS PACKAGE

A significant, sustainable economic recovery in the United States is no certainty despite the government programs designed to boost the U.S. economy. With the largest end market for aluminum being the transportation industry, primarily the auto and light truck sectors, an increase in new auto sales would lead to stronger demand for the metal.

Automobiles represent the largest end market for aluminum, with nearly a 30 percent share, and it continues to grow. Reports from the Aluminum Association, Arlington, Va., note that, on average, 350 pounds of aluminum are used per vehicle.

Reflecting the trend, a recent report for the Aluminum Association by the Ducker Worldwide notes that the percentage of aluminum content in automobiles reached an all-time high of 8.6 percent of curb weight in North American 2009 model year vehicles. The data show that aluminum content in light vehicles is projected to grow, just as it has year-over-year for nearly 40 years. “Current projections indicate this growth will continue at a rate of about four to five pounds per vehicle per year and approach 300 pounds per vehicle worldwide by 2020,” according to the Aluminum Association.

Despite this increase, the executive summary of the report notes: “Light vehicle aluminum content growth in North America, Japan and the EEU (European Economic Union) countries has definitely slowed over the last three years when compared to the rates from the late 1990s and the period of 2000 to 2006.”

According to the report, aluminum content per vehicle since 2006 has increased by 10 pounds to 326 pounds in North America, by 14 pounds to 273 pounds in Europe and by 11 pounds to 261 pounds in Japan.

Going forward, China, which has played less of a role in the secondary aluminum market than it has with other secondary commodities, is forecast to increase its domestic auto production figures, and thereby its secondary aluminum consumption, significantly.

The India-based research consulting group RNCOS Inc. reports that auto sales in China surged to 7.2 million in the first seven months of 2009, up 23 percent from the same period in 2008, despite adverse business conditions resulting from the global economic slowdown. Automobile production in China is expected to reach 16 million vehicles by 2012, helped by government policies.

Michael Kirk, president of Golden Aluminum, a Colorado-based aluminum trading firm, says he is bullish about the aluminum market moving into 2010. Kirk says 2009 was a fairly decent year after exempting the first two months when markets came to a total standstill. However, Kirk adds, that even with the “better market” there are “lots of challenges.”

Kirk says the upcoming year will bring more consolidation as well as credit and financing issues, which will force companies to “reinvent themselves.”

Although many aluminum scrap dealers say they hold a fairly optimistic outlook for the market, the sentiment is not universal. Another aluminum dealer sees significant concerns looming, such as swelling aluminum inventories on the London Metal Exchange (LME).

He questions the economic logic behind climbing inventories and prices. The dichotomy, he says, is a result of financial markets, rather than companies with physical ownership of the metal, controlling a significant amount of the tonnage. These traders are more likely to exit positions as prices climb, perhaps causing prices to slump to meet a much slower demand.

LOOKING OFFSHORE

While many landlocked scrap dealers are waiting to see how the domestic auto industry will fare in 2010, those companies that have the capability are looking to offshore markets for strength.

Fadi Shahrour with Sharmet Trading, Lebanon, sees opportunities for aluminum scrap in the Middle East. “Aluminum scrap was sourced in healthy volumes owing to the appreciation of the light metal price on the London Metal Exchange,” he writes in the World Mirror. “Most of the region’s aluminum scrap is continuing to head to India,” he adds.

Other nonferrous dealers, as reported by World Mirror, note that after an almost cataclysmic collapse at the end of 2008 and the first two months of 2009, the aluminum market has been gradually clawing its way back.

Even the auto industry, which is far from robust, seems to have reached equilibrium, which has enabled aluminum suppliers to the auto industry to run better schedules.

With a fairly robust offshore market, traders like Kirk say a push from the domestic market could result in further strength. While he says he doesn’t see much happening within the domestic auto market, he adds that some secondary plants are reporting improvements.

Metal Conversion’s Carey also says he sees further strengthening in the secondary aluminum market. “People that I have talked to see a slow, steady increase; it is not insignificant.” He adds that his company has solid orders for the first few months of the year.

A COLD SHOWER

Throughout the last year, the federal government has spent billions of dollars in stimulus funds in an effort to boost the economy. While federal spending has helped stabilize the U.S. economy, a number of economists say they see inflation percolating.

Although still far from a foregone conclusion, some Wall Street analysts say the Federal Reserve could raise interest rates in an attempt to mute inflation. If this happens, there could be a slowdown in economic growth, which would likely reduce purchases of large ticket items.

The impact of the government’s fiscal policy on the U.S. economy remains to be seen. However, recyclers should continue to see decent markets for secondary aluminum while they wait for clearer signals from the nation’s capitol.

The author is senior and Internet editor of Recycling Today and can be contacted via e-mail at dsandoval@gie.net.