Aluminum Supplement -- Global Forces Hit

Once upon a time American business schools were falling all over themselves studying the "art" and "zen" of Japanese management. The thinking at the time was the Japanese were doing things better than the rest of the world. Japanese business was booming, there seemed to be a Toyota or Honda parked in every other American driveway and Japan’s balance of trade was so lopsided with the United States that Congress, in its infinite wisdom, was screaming for trade barriers and sanctions.

But times change. News reports now tell us that Japan’s economy is shifting from one of "stagnation" to one that’s in a "slump." Suddenly, the art and zen of Japanese management looks hopelessly rigid and archaic. More problematic is the pull downward a falling yen is having on the gasping economies of her Asian neighbors.

This is certainly not good news for aluminum scrap dealers and processors. Hopes for a bottoming out of the Asian crisis appear to be just that.

"I don’t expect the Asian crisis to end soon," says David Fink, president Allied Metal Co., Chicago.

What this means is the aluminum scrap destined for Asia will be looking very hard for a home in the United States. This is particularly true for aluminum scrap that typically was shipped from the West Coast to Asia.

The loss of Asia as a market is leading to a drop in the price of aluminum scrap as the heartland is unable to absorb the glut of product on the market.

"Prices of aluminum scrap are softening as the aluminum scrap is shipped inland," says Stanton Moss, president of Stanton A. Moss, Inc., Bryn Mawr, Pa. Moss further notes that aluminum scrap from Europe coming into this country is exacerbating the downward spiral in price.

"The Asian crisis has caused a glut in aluminum scrap in Europe," says Moss. "There is no home in Europe for this scrap so it’s coming into the U.S."

Conversely, the glut of aluminum scrap in Europe has strangled imports of American material.

"Currently, there is a minimal amount of American scrap being exported to European aluminum mills," says Michael Kirk, manager, Golden Metals Trading, Littleton, Co. "This is not enough to affect the supply and demand equation in this country."

The present situation with aluminum scrap is more of a supply and demand situation than perhaps ever before, according to Kirk. He notes that mills are now able to buy ingot from Russia and Australia at cheaper prices than that offered by domestic suppliers.

"Mills can get a known quality of ingot from Russian and Australia and go right to the furnaces without shredding," says Kirk. "Aluminum mills are contracting with the Russians and Australians and will continue to do so through the rest of the year."

Several of those to whom Recycling Today spoke point to factors other than the Asian crisis and countries’ response to it as a cause for the glut of aluminum scrap.

"The recent General Motors strike hurt the scrap side and secondary smelters," says Philip Zeid, president, Universal Scrap Metals, Chicago.

The automotive industry is still the 800-pound gorilla when it comes to using aluminum. When the biggest player on the block locks its doors, there’s going to be repercussions. The loss in demand for aluminum to make GM cars is still being felt in the marketplace.

"The GM strike has had a big impact because now we’re all seeing the trickle down of cancellations and delays from their suppliers," says Jay Sherwood, nonferrous marketing manager, Schupan & Sons, Inc., Kalamazoo, Mich.

In a curious turn of events, however, a significant amount of scrap came out of the GM plants after the strike ended, according to Barry Cohen, vice president of purchasing, Allied Metal Co., Chicago. Apparently, quite a bit of aluminum scrap was "sitting" in these plants during the strike and only began to move when the picket signs came down.

Not to be overlooked is the influence of the London Metals Exchange (LME) on the price of aluminum scrap.

"The LME seems to have no strength in the prime market," says Cohen. "This keeps the sales price of ingot and scrap relatively quiet. The LME seems to move 20 points one way and then 20 points the other way."

Stanton Moss echoes this sentiment. "The LME should be used as a guideline for secondary aluminum," he says. "If the LME is strong you know that the whole aluminum market is strong. It filters down to scrap."

On the other hand, Peter Rohrs, vice president of Calbag Metals Co., Portland, Ore., says that primary aluminum is not affecting scrap prices at all. He points out that primary aluminum appears to be in great demand. Statistics support this view. LME inventories for aluminum as Recycling Today was going to press stood at 486,975 metric tons. This was its lowest level since July 1991. At the same time, LME spot aluminum prices rose to $0.62 per pound, up $0.03 per pound.

Sherwood notes that "primary producers have done a pretty good job of holding back on production, but their increases have been helped by the continued economic growth and demand. Also, primary producers and other mills have increased their consumption in recent years as they have found benefits from pricing and alloy chemistry."

Universal Scrap Metals’ Zeid notes that prices continue to deteriorate because of speculators in the aluminum markets. He also points out that funds are now heavily involved in the commodity markets and are affecting prices.

"The LME primary price has become a benchmark for many transactions," says Sherwood. "Unfortunately, it’s volatile due to the investment fund activity."

All is not gloom and doom for the aluminum scrap industry. Stanton Moss points out that the automotive industry is still the largest consumer of secondary aluminum and demand will increase in the years ahead. This will come about as manufacturers substitute aluminum for steel in order to make autos lighter and, therefore, more fuel-efficient.

"Automotive, architectural and truck trailer extrusion continue to experience growth," adds Sherwood. "The auto castings and forgings are helping with ‘vehicle lightweighting’ as well as component combinations not available with steel. The trucking industry continues its growth as the economy continues strong overall growth and with just-in-time manufacturing demands trucking has become the transportation method of choice.

"Beverage cans continue to be a high volume consumer, but the demand and supply volumes don’t always match due to seasonal factors," Sherwood says.

Golden Metals’ Kirk believes that aluminum scrap dealers can improve their financial situations by working smarter.

"The scrap dealer holding on to scrap is doing himself a disservice," says Kirk. "He’s at risk of getting stuck with a lot of material. He has to work with other scrap yards to move volume."

Kirk recommends that scrap dealers cooperate with each other by sharing loads. For example, one scrap dealer might contribute one-half load to a shipment and another dealer one-half. In this manner, says Kirk both dealers can get money out of their inventories.

Kirk emphasizes that a scrap dealer must take a "monthly metal position." If things are slow he must become a "friendly competitor" with other dealers. The key is to get over the hump and look at the current situation as a long-term problem, not a short-term one.

Calbag’s Rohrs says that in today’s climate it’s difficult getting orders. The goal then is to stay ahead of the curve.

"The guy with an order to sell is in better shape than the guy who is looking for one," he adds.

Stanton Moss believes that scrap recyclers who add value to their product and improve processing methods will be in a better position to be successful.

"The challenge for people who supply and process scrap will be to make a better product," says Moss.

The quality of scrap keeps getting better and better, adds Cohen. "People realize they can’t ship garbage and expect to be paid for it," he says. "We reject a lot of loads."

How the aluminum scrap market shakes out in the months ahead may ultimately hinge on two big unknowns. The first is how consolidations in the aluminum industry will affect supply and demand.

"We’re looking to become a stronger and larger supplier to fewer players," says Zeid. "We want to meet their standards. Alliances between suppliers and their customers will be stronger. The relationship between the scrap yard and consumer is changing and will change. We’re not adversaries. They need us and we need them."

The second unknown is how long will the U.S. economy continue its roll. If the economy stalls, owing to events taking place in Asia or Washington, then all bets are off.

"I’m relatively optimistic about the marketplace," says Zeid. He sees a strengthening of prices through the end of the year "barring an unforeseen economic problem."

The author is editor of Recycling Today.