Aluminum Markets Stay Steady

Although it won’t be a disaster, 1996 promises to be a humdrum year for the aluminum scrap industry. Most observers see supply and demand in fairly good balance both for ingot and used beverage containers. While prices may fluctuate up or down a few cents, nobody is predicting turbulence in the market.

According to the U.S. Bureau of Mines, Washington, United States aluminum scrap consumption totaled 6,356 million pounds through the first nine months of 1995, up 9.1 percent over the 1994 total of 5,823 million pounds. During the same period, metallic recovery from scrap, reported at 5,558 million pounds, increased 9.3 percent.

"It would appear that secondary recovery is up about 200,000 metric tons, or 10 percent, over year-ago levels," says Nick Adams, director of statistics with The Aluminum Association, Washington. "The problem is that nobody – not Bureau of Mines, not us – has good, solid information on the secondary recovery market. We rely on samples of the total industry and that information is spotty until year-end data is processed."

One of the difficulties is the number of smaller processors, and some of the larger ones, who don’t report figures to anyone. Scrap from extrusions going to windows or doors is one tough area to measure accurately. Many facilities have their own billet casters, process their own aluminum and have no reason to report to anyone.

While the Aluminum Association picked up some reporting members from the Aluminum Recyclers Association in 1995, their numbers cover only specification ingot and there is no baseline yet for comparison.

As 1996 unfolds, demand factors will control the market, says David Fink, treasurer of Allied Metal Co. "The material is out there. Demand will push the market more than supply," he says. The Chicago-based smelter sees a strong first quarter due to weather factors. "Our customers are not incredibly busy, but they are busy enough. Prices should stay firm, maybe up a cent or so," Fink continues.

Based on year-end inquiries, Fink feels the strength will continue into the second quarter, but like others in the market, his crystal ball gets hazy after mid-year. He says there is a chance for some softening in the third quarter, and even if the market pulls back to first quarter levels, he says there may be enough drive in the market to see a solid rebound by the year’s end.

"At the moment, I see no major changes from where we are," he adds.

"It’s not going to be a great year, but it will be a fair year," agrees aluminum broker Stanton Moss, president of Stanton A. Moss, Inc., Bryn Mawr, Pa. "The LME (London Metal Exchange) price can stay right where it is."

Solomon Hirsh, vice president of Aluminum Recycling of Warner Robbins, Warner Robbins, Ga., sees it about the same way. "It has been pretty steady for the last few months of 1995, and 1996 looks good to me," he says.

Part of Hirsh’s optimism stems from the reprieve given to the local U.S. Air Force base. Last year it was on the review list of bases slated for closure. But a reprieve for the base means the construction and other scrap-generating activities in the area will continue. Such local ups and downs can change the complexion of a market for regional dealers.

Ed Pchola, vice president/operations for Alcan Recycling, Cleveland, takes a slightly longer look at the market. "As we enter the next century, recycling’s growth will continue to at least match, and possibly overtake, the pace of overall aluminum growth," he says.

About 30 percent (or 7 million tons) of aluminum produced in the western world is from recycled material. "This figure will only go up as overall aluminum demand grows," Pchola says, emphasizing that recycled aluminum must be seen as a "compatible ally that supports and complements the overall aluminum supply," not a competitor of primary aluminum.

Alcan has operations in 20 countries and 735,000 metric tonnes of recycling capacity in the U.S., Canada, the United Kingdom, Italy, Japan and Thailand.

A ton of recycled aluminum in 1995 had an average value between $1,600 and $1,700, so the average soft drink can was worth just under three cents in scrap. The typical American uses 489 beer and soft drink containers of all types in a typical year, or more than one per day. More than three quarters of these containers, 366 per capita, are aluminum cans. Consumption of steel cans, which make up a small portion of those used, is declining. Most of the market share is going to aluminum – and two-thirds of the aluminum cans used in the U. S. are recycled.

Moss discounts much of the effect the UBC market could have on scrap aluminum prices. "I think the can stock business has already been booked," he says.

Larry Yockey, manager of aluminum trading for Markovits & Fox, San Jose, Calif., notes that the UBC market follows producer prices and the LME. "UBCs will continue to act as they have during the last nine months (of 1995)."

At the end of the year, UBC prices were running in a fairly narrow range between $1,600 to $1,700, tending to the lower side. According to a senior executive at Anheuser-Busch Recycling Corp., St. Louis, the market probably will continue in a similarly narrow band through the first quarter of this year.

Can scrap reclamation – on a receipt basis, not consumption basis – is down 5.5 percent according to Aluminum Association figures. Bureau of Mines says it is down about 2.5 percent. "The principle driver of the UBC market is can stock," Adams says. "Can shipments are basically flat. We are moving the metal, but it is being diverted to other uses since the can industry is not taking much more."

December shipments confirm Adams’s observation. They were unusually slow, but optimistic market watchers hope this may provide some early-year pep to UBC prices. At the end of 1995, spot prices paid to consumers for aluminum cans by Anheuser-Busch were at 35 cents for lots under 100 pounds and 37 cents over 100 pounds. That was down seven to eight cents from levels seen in the spring of 1995.

The same trend holds for non-UBC industrial aluminum scrap. "Supply seems to be on the slow side, but my expectation is that factories will be generating more material," says Alan Cohen, a principal in Central Metals Co., Atlanta. "That means the scrap business should be picking up."

Atlanta is more a distribution center than a manufacturing city. Much of the aluminum scrap generated in the Atlanta area comes from manufacturing, mainly in the housing industry. What automotive business there is in the Atlanta area has been steady, if not brisk. "I do see a pick-up in the level of housing activity," Cohen continues.

Much of Cohen’s bullishness on aluminum scrap comes from the good market in ferrous. "I would say ferrous bodes well for both aluminum production and for demand. That indicates some pricing increases as long as the worldwide economy stays relatively stable."

Larry Berry, vice president of Huron Valley Steel Corp., Trenton, Mich., sees a similar trend in industrial scrap. Although Huron Valley does business nationwide, the auto market is a major factor. "For now, demand is strong and supply is tough to come by," he says. "People are holding stocks, thinking that the market will become stronger."

As 1996 progresses, he sees supply-demand following a normal course: the late winter months will be pretty good; in April and May there will be a bit of a slowdown, followed by further slowing through the summer. That summer dip is the result of auto manufacturers closing down for assembly line changeovers.

"I’m comfortable with the market," Cohen says. "I’m bullish on ferrous and comfortable on aluminum."

Berry notes that demand on the automotive side is relatively strong. "I don’t see that changing – but then, auto firms can cut their units at any time."

While the die business is off a bit, it is a slump from fairly high levels to normal levels. The pull-back in most areas is from 120 percent of production levels to 100 percent. Shops still are working full or partial shifts on Saturdays.

"1996 will be a fair year, overall," Berry expects. But, he notes, prices often are influenced by LME speculators and funds people, not smelters or end users.

What many observers fear is a slowdown in the European economy. If Europe’s demand drops, that means there will be more aluminum units available for consumption. Higher supply, of course, will have a depressing effect on price. That’s the downside of the equation. However, with relatively little supply in the pipeline, any upswing in demand could have a substantial positive effect on prices.

Although the export market to Asia has been fairly strong in the recent past, there is some expectation that it will weaken because the Japanese economy is not doing as well as expected. There still will be significant demand from Japan, however, sources say.

Yockey notes there is still room in UBC pricing for offshore dealers to buy cans in the Los Angeles area and ship them to Japan. This still holds true, even though the Japanese are paying lower premiums today than before. "The Bay area here spins off the Los Angeles area market. We will ship to L.A. if the freight is justified," he says.

Moss says the international aluminum market is not turning around. "Europe seems to be taking care of its own needs," he says. "I don’t see much happening in export."

Like the North American market, the European market is approaching the crest of a great wave. Market makers are looking elsewhere for markets where the growth curve might duplicate what has been experienced in North America.

"At these extraordinary high levels, future incremental growth – in recycled percentages – will be slower than in the past in North America," says Pchola. "Instead, the recycling of UBCs will grow faster in emerging markets around the world where opportunities for penetration are much, much higher."

He predicts a bigger growth in aluminum demand from South America and Asia during the next five years.

If these international growth predictions are true, it follows that scrap will have to be sourced from wider geographic locations. This has several implications, Pchola notes. "We can expect the overall quality of scrap to deteriorate," he adds. "The growth demand in emerging markets may outpace the ability to collect and recycle these products. We have already started to see this happen. To make up the gap, scrap sourced from a wider area will increase the possibility of contamination."

The cost of building a recycling plant is 10 percent to 20 percent of that for a new primary smelter. Alcan put up a 120,000 tons per year recycling plant in Kentucky for $50 million – just $400 per ton of output. Construction was a fraction of the time required for a smelting operation and ongoing costs are similarly attractive. The energy required to recycle a pound of scrap is 5 percent of the energy to produce a pound of primary aluminum.

As a result, consolidation has occurred in the recycling industry, notably among secondary smelters. In 1983, there were 58 secondary smelters in the U. S. – today there are 23.

"Smelting and the secondary industry are going through tough times," Moss says. "Many are on shaky financial footing." Smelter closings have effected demand in the Warner Robbins area, too, Hirsh says. "Some smelters have just shut down due to oversupply," he notes.

There will be changes in the way recyclers do business, including consolidations, strategic alliances, purchases, mergers and tolling. "Stand-alone businesses will come together, if not by ownership, then by alliance," Pchola says. "Alliances will form between scrap tolling operations and minimills producing sheet products from scrap."

Use of lightweight materials, particularly aluminum, is becoming more attractive to world automakers. Pchola predicts the average aluminum content in cars will rise from 200 pounds to 300 pounds per car by early in the coming century. He sees growth of aluminum demand – both recycled and primary – at a 6 percent to 7 percent clip, led by castings and followed by sheet.

Automotive use of aluminum sheet for exterior body panels may climb from its current 35 million pounds per year to 200 million pounds by 2001.

All Big Three automakers will soon be producing vehicles – such as the Plymouth Prowler roadster, GM’s EV1 electric car and the Ford Synthesis-2010 sedan – made mainly of aluminum, with aluminum main frames, castings and sheet.

Going into 1996, spreads were wider than normal in the secondary market. "I’d bet they will narrow over a period of time," Yockey says. The question remains over how long that period will be. However, barring some cataclysm in the aluminum market, it is doubtful the movement will be anything more than a few cents one way or the other.

According to the aluminum castings data, basically a survey of the foundry industry, numbers are up about five percent from year-ago levels. "Foundry demand appears to be going up," Adams says.

In all, the 1996 aluminum outlook does not promise the excitement that a gambler or market speculator looks for when playing the markets. People who try to profit from market crises and big price swings will be looking elsewhere for action. For those who make their living from aluminum scrap, perhaps that is the best thing that can be said about this year’s market outlook.