Aluminum Supplement -- Aluminum Pricing Stays South

he aluminum market currently remains an enigma, or to put it another way, "it’s out of whack," according to Lloyd O’Carroll, an investment analyst with Scott and Stringfellow, Richmond, Va. O’Carroll has 20 years of experience in the aluminum industry, having worked for Reynolds Aluminum.

"The London Metals Exchange has aluminum at low levels, and that would normally mean higher prices," he says. "But that’s not the current situation. The supply-price relationship is reversed."

O’Carroll and others in the industry are pointing the finger at nervous investors who are speculating that aluminum prices will get even worse due mainly to Asian economies that are struggling. In addition, recent economic indicators on the strong United States economy are signaling a possible weakening, adding more confusion to the situation.

All of this, plus the recent General Motors strike, have combined to drag down not only the price of aluminum, but other metals as well, as metals for car production had to be consumed elsewhere in the market. But the strike will obviously only have a short-term effect on aluminum. "By the end of this year, GM will have caught up with production and it will be as if there never was a strike," says O’Carroll.

Automotive analysts, looking down the road, say that GM still needs to build cars and trucks more efficiently. If the company does not revamp its production techniques, then it could experience a more serious fate – loss of market share. If that happens then scrap flows will have to shift to other auto plants or industries.

"Aluminum is fundamentally sound," says O’Carroll. "And we know that because copper, nickel and other metals are feeling the same pricing pinch."

Others in the market agree. "We are definitely at the bottom of a normal cycle," adds Tom Mele, president of Connecticut Metal Industries Inc., Monroe, Conn. "And we have been at the bottom before. It’s like any commodity. But while the farmers can get federal relief, we cannot, and have to simply go about doing our business day to day until prices rebound."

Mele says that investors really have no reason to be too worried over the aluminum situation overseas because the U.S. market has been able to consume the aluminum scrap just fine. "I can tell you that we certainly are busy moving material," he says. "Most of the scrap that was destined for Asia, is being consumed domestically or in Europe."

The situation in Asia is so bad that ship-ping lines are offering substantial discounts to move material; however, it still isn’t making it economical to ship if the market is not there.

O’Carroll says he recently talked to an Australian producer who was looking to ship finished aluminum products to Asia, but instead shipped them to North America because the shipping lines gave him the same rate, and because the market here is stronger.

Another factor is the strong U.S. dollar. Mele believes this is one of the main reasons why the metal markets are down, and a lid is being held on the market. "The aluminum market is okay, it is just that the dollar is so strong relative to other currencies that the flow of scrap is toward the U.S. and not away like it has been," he says. "Even with discounted freight rates, it is still not economical right now to ship because of the strong dollar and the poor markets in Asia. Scrap from Mexico and Canada is also coming into the U.S."

The days of 60-, 70- and almost 80-cents a pound for aluminum used beverage cans seem to belong to a distant past. There were even predictions at one time that a pound of UBCs would one day fetch a dollar. Recently, UBC pricing slid to almost the 40-cent mark. It was just at the beginning of the year that UBCs were selling in the 52 to 58-cent price range. Companies were getting only 42 to 48 cents a pound as of July.

At Schupan & Sons, Kalamazoo, Mich., the outlook is not gloomy, but still cautious. "I don’t think the market can go any lower," says Marc Schupan, president of the company that has operations throughout Michigan and into Indiana. "We are at the very bottom of a cycle that is beginning to stabilize, and will start moving back up. Confidence is high with the U.S. economy, and that will be the key to a rebound in pricing – if the public and investors can maintain that confidence into the second half of this year and into next year."

Schupan says that mills are currently paying between 44 cents to 47 cents a pound for aluminum scrap, and when it goes that low it creates a ripple effect throughout the industry. "That means there’s a lot more pressure to be profitable, and there is a tighter squeeze on what we can pay customers for scrap. In turn, it reduces the motivation to recycle at the grassroots level."

In Connecticut, Mele points to a similar situation, saying his company is getting about 46 cents a pound from the mill, and only paying about 25 to 30 cents retail for cans. "When it gets that low, fewer people want to recycle, and in the Northeast unemployment is low, therefore, fewer people are out there bothering with collecting cans."

Overall, Schupan says that several nonferrous markets are at all-time price lows. "I think copper is at a 12-year low," he says, "and both nickel and aluminum are at five-year lows." He also adds that consolidation – especially in secondary aluminum – has been detrimental to the industry.

"[Aluminum] ingot lost a lot of people," he says, "and Philip Environmental did not help, either. The company went on a buying spree of aluminum processing operations about two years ago, now they are trying to sell it all off. That’s not positive for the industry."

With prices for aluminum about 8 to 10 cents a pound below what they should be, and an expected turnaround in Asia, O’Carroll says everyone in the aluminum chain, from scrap recyclers, processors to producers, should start building inventories now.

"Anyone handling aluminum should be acting now as if prices are going to take a jump," says O’Carroll. "If Japan, in particular, turns around with a new government this fall, and investors aren’t as worried, expect to see a major rise in aluminum prices. Prices just won’t inch up, they will leap up, and this should happen by the 4th quarter of this year." O’Carroll reiterated that there is nothing fundamentally wrong with aluminum because all metals are down.

O’Carroll sees Japan as the linchpin of the Far East region, and says the region goes the way Japan goes. And so does the LME. "If the yen strengthens, then we will see a rally on the LME," says O’Carroll. If it weakens, the LME goes down.