On Top and In Demand

If the scrap industry thinks that it has experienced consolidation, it might be reluctant to try to compare with what has occurred within the

aluminum industry.

Consolidation of both primary and secondary aluminum producers has been steady and significant, as well-funded companies fight for market share in what should continue to be a growing market.

Aluminum as a material in the all-important vehicle production segment is growing measurably, industry advocates say, and the commodity is one that will be increasingly present at scrap yards as the decade progresses. If the demand continues to exist for the steady supply, aluminum should remain a nonferrous all-star in the scrap lineup.

Staying on the Road

The automobile is critical to the scrap industry for two important reasons. Obsolete autos have been a vital source of scrap supply for decades, while vehicle manufacturing is a key end market for several types of metal. Traditionally, the links are especially strong between scrap steel and the automotive market.

The state of the aluminum scrap market is now also closely tied to both aspects of this automotive equation. With the dominance of the automobile shredder as a processing technique, an increasing amount of aluminum scrap is being processed as aluminum twitch—or aluminum pieces extracted from the post-shredder stream.

Concurrently, overall demand for aluminum (both primary and secondary) is greatly affected by the success of the metal to establish itself as a material for mass production automotive components.

Last year marked a turnaround year for aluminum scrap on the supply side, as automobile shredders revved back up with the revival of acceptable pricing in the ferrous scrap market. 1999 produced more of the same on the demand side, as the transportation segment (as well as other industrial segments) remained healthy in North America, and aluminum products remained in demand.

"When shredders aren’t working and they aren’t producing the twitch, the secondary aluminum producers start going into the primary scrap market—up the food chain—and that takes scrap away from the sheet mills and extruders," notes Larry Sax, senior vice president with Jack Engle & Co., Los Angeles. "That’s when aluminum scrap is in short supply," adds Sax, who is also heading up a Jack Engle & Co. sister consulting company to be known as New Millennium Recycling.

The rest of the world may also be increasing its appetite for aluminum scrap, if figures for October 1999 are any indication. While the first nine months of 1999 witnessed a continuation of sluggish overseas demand for aluminum scrap generated in the U.S., October saw a 10,000-ton increase in shipments. According to the U.S. Commerce Department, much of the new demand came from China, while orders also increased slightly from other Asian nations such as Japan, South Korea and Taiwan.

The demand from overseas may not be filled in 2000, however, simply because domestic consumers are keeping scrap at home. "In the early part of December, I had a lot of calls for lower grades of aluminum from brokers going overseas," says Brian Carlone of Annaco Inc., Akron, Ohio. "But when demand and then pricing increased, China couldn’t compete [for the scrap]."

While aluminum remains in extensive use in other manufacturing applications, the aluminum industry is making a concerted effort to capture more of the large-volume automotive component market. According to The Aluminum Association, Washington, the average vehicle in the 1999 model year contained more than 240 pounds of aluminum, an increase of nearly 9% just since the 1996 model year.

The implications of aluminum’s gains have not been lost on the scrap industry, which has intensified its efforts to recover as much aluminum as possible from the post-shredder stream. Many operators of automobile shredders—though they may still have the words "Iron & Metal" in their company names—are acutely aware that their profitability is largely tied to their ability to extract marketable aluminum (and copper) from the material processed.

Certainly, on both the supply and demand sides, the continuing health of the North American auto industry will remain an important factor influencing the aluminum scrap market. That being the case, stability seems to be in the forecast, as automakers are projecting that their assembly plants will continue to produce roughly the same number of vehicles in 2000 as they did last year in order to meet solid domestic (and some overseas) demand.

In the Can and Through the Wire

While decisions regarding automotive component material choices are closely watched by recyclers, the automobile is not the only end market (or the only scrap supply source) for aluminum.

The humble beverage can, though it gets lighter each year, continues to be produced in large enough quantities to account for a significant share of the aluminum market. In addition to being "lightweighted" to reduce shipping costs, processors of aluminum used beverage cans (UBCs) may be facing another threat to their supply: the re-sealable plastic bottle.

The single-serve beverage market has been converting rapidly from aluminum cans to plastic polyethylene (PET) bottles. A trip to virtually any carryout store reveals the extent to which plastic bottles have replaced the aluminum can on the shelves of in-store soft drink coolers. Makers of PET bottles have also increased their efforts to design and market six-packs and 12-packs of plastic soda bottles for grocery store purchases.

As if defending their turf in the cola market was not enough work, can makers (and glass bottle makers as well) will soon be competing with plastic for the attention of beer drinkers. Both of America’s largest brewers—Anheuser-Busch, St. Louis and Miller Brewing Co., Milwaukee—have test-marketed a single-serving plastic beer bottle within the past year.

The competition facing the beverage can is showing up in statistics kept by the industry. According to the Can Manufacturing Institute, Washington, total shipments of aluminum beverage cans in the U.S. declined by 0.7% in 1999, down some 725 million cans.

For those processors who specialize in buying UBCs and shipping them to UBC consumers, the trend is somewhat sobering. The aluminum beverage can is far from extinct, but any forward momentum it once had as a packaging material has certainly stalled.

One area of hope for UBC recyclers may lie on the "green" political front, where the plastics industry and the food processing industry are hearing from factions disillusioned with the state of plastics recycling. In the state of California, makers of plastic packaging are being compelled to sign agreements pledging to either use secondary resins or else to engage in further lightweighting of their packaging, which the state fears is often destined to go from the recycling bin to the landfill.

Coca-Cola has become the target of one environmental group, the Grass Roots Recycling Network (GRRN), Athens, Ga. The group has targeted Coke for failing to live up to an earlier pledge to use 25% recycled content PET packaging and has staged various campaigns to notify the public of Coke’s unfulfilled promise. GRRN's most recent protest (which was cancelled due to inclement weather) coincided with the Super Bowl, where GRRN was claiming that Coca-Cola was spending more to act as a corporate host and sponsor in its home city of Atlanta than it would have cost the company to fulfill its pledge to use recycled-content bottles.

If plastic bottles remain a difficult material to recycle profitably, aluminum producers and recyclers may have to hope that environmentally aware consumers drink enough soda and beer to lead a consumer-driven return to the aluminum beverage can.

In the meantime, the cold of January and February has been enough to cause a further drop in UBC generation, at least temporarily. "During the winter months, coffee replaces cola in a lot of people’s daily routines, so the UBC supply does lessen," notes Annaco’s Carlone.

Weather-related spot shortages of aluminum scrap have coincided with aluminum price increases tied to the LME. For processors of aluminum scrap other than UBCs, the price hike has meant a welcome increase in scrap supply, as some dealers who held onto material waiting for a price increase begin to emerge.

"There is currently a whole lot of interest from people trying to move material," says Jeffrey Mallin of Mallin Bros. Co. Inc., Kansas City, Mo., whose company specializes in the processing of wire and cable. "People who had been sitting on aluminum wire or alloys are definitely interested now," he adds.

Unfortunately, a sudden price increase also causes consumers to be more careful in their buying. Many consumers adopt a "wait and see attitude," says Mallin.

For most secondary aluminum products makers, tight margins due to high scrap prices and heated competition with primary aluminum producers have caused profit margins to diminish severely.

Going with the Flow

In May of 1999, Larry Sax made some remarks at the Spring Convention of the Bureau of International Recycling, held in Rome, regarding the state of aluminum scrap supply.

"At the Rome BIR meeting, I wondered aloud if the mine above ground was disappearing," says Sax, who made the remarks at a time when ferrous scrap processors were still running their auto shredders on low idle due to depressed ferrous pricing. "But price is a big factor in how material comes to market. Since then, it has become clear that folks were sitting on material."

The situation as the year 2000 begins, says Sax and other aluminum scrap processors, is much better. "Scrap has been flowing, especially in the United States, but also worldwide," Sax remarks. "I think North American exporters have to keep a sharp eye out for the Far East—especially drawing material from the West Coast and sometimes the Gulf Coast. If the time is right and the price is right, nations such as Japan, South Korea and China will be in the market and they will draw material from the U.S.," he says.

"Overall, right now the demand seems pretty strong," says Bill Karr, area business manager of the Wise Recycling LLC site in Alsip, Ill. (near Chicago). "I don’t see that falling off too much," he says of near-term demand. "It seems the mills are pretty eager. We’re feeling pretty confident."

If the long-term picture is good, the automotive market will continue to be an influencing factor. General Motors Corp., Detroit, will reportedly begin building a V-6 engine in Canada next year that will be composed largely of aluminum. According to a report in American Metal Market, aluminum scrap will in all likelihood be an important feedstock material for the engine’s production, which will take place in St. Catharines, Ontario.

Advances in secondary smelting technology may be another bright spot for the aluminum scrap market. The hills of Appalachia (or the nearby Bluegrass Country) are home to three secondary aluminum operations that may become important stepping stones to industry growth.

The Norwegian firm Norsk Hydro is building a plant in Henderson, Ky., that the company claims will be able to produce high-quality aluminum billet from scrap while using just 5% of the energy of traditional smelting methods. The new plant will have an initial annual capacity of 90,000 tons per year and will be in operation next year. Hydro is investing $33 million to build the plant.

"Our decision to build a recycling plant in the U.S. offers this market several advantages," says Jim Walters president of Hydro Aluminum Louisville Inc. "First, the plant will increase the supply of primary-quality billet in a market that is not producing enough aluminum to meet current and expected demand," he adds.

Walters also notes that the energy-efficient use of scrap will also reduce Norsk Hydro’s customers’ costs significantly while contributing to "improving the recycling effort in the United States."

Industry giant Alcan Aluminum, Mon-treal, is also planning to upgrade a smelter in Sebree, Ky., to become a 30,000-tons-per month producer of primary-quality billets made from scrap. Most of the scrap melted at the Alcan facility will reportedly be purchased as prompt scrap from aluminum extruders.

And in Friendly, W. Va., Resource LLC is operating a rotary furnace that can process up to 3,000 tons-per-month of aluminum scrap and dross. The furnace, designed by Altek International, Exton, Pa., should allow the company to profitably process lower grade byproducts that have traditionally required several steps to process. Resource LLC may eventually add two more furnaces at its Friendly site.