Uneasy feelings

Economists continue to point to a growing U.S. economy. However, the mood in the scrap processing business can be far less bullish, as scrap dealers say prices are “OK,” movement is “good,” generation continues to be a major problem and margin compression is making it difficult to remain profitable.

Demand for many nonferrous metals, particularly aluminum, seems to be gaining steam. Dealers of aluminum scrap say the domestic automotive industry continues to be strong, which has helped strengthen many of the secondary producers supplying the auto industry. Additionally, aluminum is comprising a larger percentage of automobiles, which is helping firm up end markets for the metal.

One source says he expects to see higher aluminum prices on the London Metal Exchange (LME), which should filter down to better pricing for aluminum scrap. Structurally speaking, good prospects are ahead.

The more positive outlook for aluminum ends several years of fairly bearish sentiment toward the metal. Despite more encouraging words from scrap recyclers as to the relative health of markets for the metal, the optimism is hedged by the lack of aluminum scrap supply available. “Secondary aluminum will see structurally tighter spreads until the next cycle, perhaps five or six years in the future. Demand will be there, but spreads will be tighter,” one aluminum industry analyst says.

On a global basis, a more recent trend has been the widening spread between the transactional aluminum prices in China and the rest of the world. The research group Harbor Intelligence, Austin, Texas, says the spread has widened the farthest in nearly two years, which is benefiting the domestic Chinese aluminum industry.

As the rate of growth for China’s economy changes from double digits to roughly 7.5 percent, orders for aluminum scrap from the U.S. will be soft for the next several quarters, according to reports. At the same time, a number of Chinese buyers are looking to consume more domestically generated grades of aluminum scrap, which could limit the flow of scrap from the U.S. exported to the country.
 

The outlook for copper is less certain. Both bullish and bearish signals are likely to play roles in the metal’s short-term future. On the positive side, copper inventories on the LME have sharply declined since the beginning of the year. Another factor likely to help copper and copper scrap markets is Europe’s emergence from a protracted recession, as a number of economic analysts point to positive growth in most regions of Europe. Finally, global vehicle demand has been growing, which has helped to pull copper markets along.

Despite these positive signs, the short-term future for copper and copper scrap is far murkier. The biggest cautionary flag continues to be China. The country’s economic slowdown, as well as questionable financing arrangements in China, have cast a pall over the metal.

Because China is the largest consumer of copper, both in the form of scrap and anodes, any slip in the flow of the red metal to the country will have a significant negative impact on prices for these materials. Reflecting this trend, more recent prices have been somewhat volatile, though they have been trending toward the downside over the first quarter of 2014.