Keeping the Flame

Aluminum scrap dealers and consumers keep their facilities charged up despite a tepid economy.

If the adage “slow and steady wins the race” holds true, the aluminum scrap market will be a winner in 2002. Material is moving over the scales – but slowly. The market willhave some fluctuation – but within a fairly narrow band.

Demand is there – but nothing to write home about.

In short, 2002 promises to be a satisfying year for aluminum scrap but not one that will be remembered either as wildly successful or extremely painful.

Most of the people on both the supply and the demand side would echo the remark of Brian Carlone, non-ferrous manager at Annaco Inc., Akron, Ohio: “We’re like the turtle – slow, but steady.”

SLOW RIDE

“Things are slow. We’re down a bit – say maybe 15 percent,” says Randy Castriota, president of Castriota Metals and Recycling, Pittsburgh.

Castriota deals with a lot of smaller companies and peddlers and does not foresee a lot of change in volume moved over the next six to 12 months. “I’m optimistic,” he says, but adds that realistically there is no overriding trend that he can see on the horizon that would change his mind.

Carlone would put the figure in his area at about 20 percent off comparable years. “Receivables are slow,” he says. “It is harder to move quantities to the de-ox people.” This is due to lower demand in the de-ox market, which sells to the steel industry.

Yet overall, things seem to be hanging tough. “Demand did not fall off as badly in the fourth quarter (of 2001) as some expected,” notes Arnold L. Fish, partner in the brokerage of Lakeshore Metal Trading, Evanston, Ill. He sees brighter prospects into the spring and summer. “Should it jump up, that would be the norm. But right now it is very reserved.”

Still, he did not observe the usual stockpiling that occurs around the New Year when buyers take in material hoping for the typical three or four-cent increase in January. “I don’t know anybody who did that this year. Nobody loaded up,” he says.

A Midwest consumer, while noting that their smelter was getting what it needed, says scrap is getting a bit tighter. However, that lack of scrap was keeping pace with a lack of demand. He saw the trend continuing through the second quarter with little change in sight even beyond that.

Whether East or West coast, there is no question that material flow has slowed, following the slowdown in manufacturing. In the Midwest, it is the auto industry. In other places it is consumer goods or airline industry related.

The secondary business is not the happiest field to be in. Margins are slim. The market is working to shake off its excess capacity. Dealers find themselves reaching to compete for scrap and then dealing with a negative auction when selling ingot.

With material moving, however, there is still hope for enduring the present and even improvement for the future. The question is, “When?”

“It’s going to be a year before things change,” Castriota remarks. Even coming out of the usual New Year slowdown, he did not see a lot of change in the market. Consumer confidence, economic optimism and the recession all will have to change before he sees any uptick in the market.

In the western Great Lakes area, aluminum has been moving pretty well. “Flow has been quite good, there is quite a bit of material for this time of year,” says Marty Vazquez, general manager at City Scrap Metal, Chicago. City Scrap buys from peddlers and the majority of the material that comes in is 63s – material that is not too clean.

While in-flow was good around the New Year, Vazquez says it was tough to move material at the end of 2001. Despite that, he finds prices are not shifting a lot. “Price is holding pretty good,” he says.

 INTERNATIONAL OUTLOOK

Fish says that Taiwan is not as aggressive as it has been in the past, but is still in the aluminum scrap market. Korea has been a bit more active at fractionally higher prices.

Another international merchant agrees that the business to Taiwan and the secondary markets is not too bad. Korea continues to be fair.

China, although following normal patterns with a pullback for the Chinese New Year, has been a positive influence on the market. Demand has been good, especially in areas like cast aluminum and painted extrusions.

Japan is the bleakest spot in the international market – or any market, for that matter. Reports from Japan range from “bad and only getting worse” to “bleak.” With the Japanese Yen around 132 to the dollar, there is some legitimate concern that any worsening of the situation will turn the spigot off completely. To add agony to the existing pain, some traders fear that a deepening of the crisis in Japan could spread to other markets that, for the moment, are doing well.

Much of the potential for scrap in Asia follows the general economies of the nations there. Overall economic growth prior to 1997 was strong. There was a general recession in 1997, but by 1999 recovery was well on its way. Economists were hoping for an overall seven percent growth rate in 2000, but things collapsed quickly in key spots like Japan, Hong Kong, Taiwan and Singapore. International Monetary Fund (IMF) figures show that Malaysia’s expected 8.5 percent growth turned out to be 0.3 percent. Korea, projected by the IMF to show 8.8 percent growth, turned in a relatively anemic 2.2 percent.

However, there are encouraging signs of both recovery and acceleration for 2002. The IMF has projected resurgence for the Asia-Pacific region, and projects 3.5-4.2 percent growth by the end of 2002.

SUMMER HEATS UP

Vazquez is optimistic about the summer months. “I think we’ll see a lot of scrap coming our way,” he says. City Scrap hopes to expand its aluminum market beyond its regular peddlers and into industrial suppliers.

“We’re looking to increase our business with industrial suppliers,” Vazquez says. He says they are in the market for prepared scrap. “We’re looking for better quality material,” he explains.

Vazquez sees some slight upticks in the market as the year wears on, but nothing moving in a steady trend. “The market will be up and down,” he says. “I think it might increase a little – maybe five percent,” he says.

Fish says business should be better starting now through the second quarter and into summer. “Demand was there through some very difficult times,” he points out. “It held up to a certain extent,” he notes, and says that could bode well for the summer.

Through the winter months in the North, it is no surprise that people are not putting up aluminum siding or new windows. What is surprising is the amount of competition among scrap facilities for the material that was produced and is expected as the spring construction market picks up.

“There is real competition out there,” Carlone says. “Contractors are calling around for aluminum prices. They’re not just taking it off their trucks.”

That would indicate that the street is aware that options are available and that things are tight enough that even the little guys are counting nickels and dimes.

The domestic sheet mills are seeing a tiny bit of improvement, although volumes are not where they used to be. And extruders are perking along. Extruders seem to be getting a bit more active while struggling with lower volumes.

Recyclers feel that the give-and-take will continue throughout the year. “It’s going to be a year before anything changes,” Castriota adds.

In the Midwest, the big hope for improvement is for the automotive industry to make more cars and for the consumers to buy more. A lot of cars moved with the zero-financing deals at the close of 2001. Some observers wonder how many more qualified buyers are out there.

Speaking of credit, there is widespread concern about industrial credit ratings, especially in light of what happened in the steel market. But not everyone is in the doldrums.

LOOKING AHEAD

Steve Fehling, vice president of purchasing and metal management for Alcan Aluminum Corp., Cleveland, says he expects a turn-around in the used beverage can (UBC) business sometime around May of this year. That would track historic data trends. “I don’t think there is a lot of holding going on,” he says.

Most of the major companies, Alcan included, are scheduling their plant shutdowns for the winter months. This helps keep spreads at a reasonable level since the outages are scheduled at times when there traditionally are fewer cans available.

Fish is mildly optimistic. He notes that the mass media are slow to print good news. “Bad news sells papers,” he says. But he notes that things have not been as bad as the talk on the street would have it. Interest rates have been extremely low, Fish points out. He also points to the Dow Jones stock index. “It generally is a precursor for the next six months,” he says, adding that the Dow (but not the NASDAQ) promises better things down the road.

Many broad-market economists seem to expect a turn-around in the larger economy in the third or fourth quarter of 2002. Currently, aluminum, copper and most of the other metals are in a slump. With the demand cut, supplies increased and price dropped. Even though prices are tied to the LME, there seems to be some optimism that the LME may become a friendly force later in 2002.

Some of the negatives in the 2002 aluminum market might just turn out to be positives. The least bit of upturn in demand is apt to be exaggerated through the system. Any strengthening of demand will have to be filled from somewhere and this could perk up the scrap market.

If Q2 and the second half do see a sizable improvement in demand, the market could become quite explosive, even volatile, until supply and demand equal out.

Fish admits he has no idea what the London Metal Exchange (LME) will do. ”It’s been fairly stable recently. If I look for reasons why it should go up and down, I don’t see anything that makes me think the LME will go down,” he says. “If anything, it should move upwards.”

Carlone says that his crystal ball is pretty smoky. “I don’t see any large price increases coming anywhere in the next year,” he says. “We’re slow but steady. There is nothing driving the market.”

Sometimes, boring can be good. If you buy into that philosophy, then 2002 will be a good year for aluminum scrap.

The author is a Recycling Today contributing editor based in Strongsville, Ohio. He can be contacted via e-mail at curt@curtharler.com.