Smoothing Out the Wrinkles

At least one industry observer believes the aluminum industry may have experienced a similar phenomenon in January of 2001. A series of circumstances-ranging from sharply rising energy costs to gloomy auto sales projections-certainly seemed to come together to pile trouble onto the North American aluminum industry throughout the month.

How quickly and vigorously the aluminum and aluminum scrap markets can bounce back will be the issue facing dealers and processors in 2001.

SUPPLY AND DEMAND

As with all commodities, supply and demand are the biggest influences affecting the moods of those involved in the scrap aluminum industry.

A balance between the two is usually considered critical, but even if supply and demand are in balance, it may not be much comfort to scrap dealers and brokers if that balance is at the lower end of activity.

Economic forecasts (and warning signs) pointing to slower growth and fewer purchases of autos and other products by end consumers apparently had an immediate impact on the aluminum industry. One scrap trader even goes so far to say that automakers and their first-tier aluminum parts suppliers over-reacted to the possibility of a slowdown.

“Basically, the demand for scrap has slowed down because of re-evaluated sales projections,” he says. “Consumers’ interest in scrap is judged by sales projections, and their purchasing departments tend to over-react when projections go up or down.”

Whether scrap buyers have over-reacted or exercised proper judgment will be known in ensuing weeks and months as factory orders for aluminum products are made. “It has been what I would call a hard landing,” Rick Rifkin, president of the Nonferrous Operating Group for OmniSource Corp., Fort Wayne, Ind., says of early 2001’s aluminum market.

“Demand has just fallen dramatically from all sectors-mills, extruders, and secondary smelters, although they held up for a little longer,” Rifkin adds.

While things should pick up, “I don’t think there will be a mad rush to buy scrap in February,” he says. “I think there will be a gradual improvement.”

“Secondary smelting is in a state of vast overcapacity,” remarks Jim Diamond, vice president-sales of aluminium.com, New York, adding that his former employer, Wabash Alloys, is moving to shut down or slow two of its smelters. Energy costs, particular in the western region, have halted or curtailed production at other smelters.

Lower energy costs and an overall uptick in the economy are what the aluminum industry needs, says Diamond. “If it is demonstrated that a good transition to the new Presidential administration has occurred and that they can work with the Fed, the people could regain their confidence,” he says.

Like demand, aluminum scrap supply is also down from peak periods. “That’s because of our steel and ferrous scrap problems,” says Diamond. “The auto shredders are running at 30% to 40% of capacity, it’s being projected.”

Less shredded ferrous scrap also means less aluminum twitch byproduct coming off the shredder lines. “When steel scrap is not flowing across the scales, the flow of tag-along nonferrous items also slows down,” says Larry Sax, a trader with Jack Engle & Co., Los Angeles. Sax, who has been president of the nonferrous division of the Bureau of International Recycling (BIR) for eight years, works out of a Las Vegas office.

Like Diamond, he is also hopeful that a smooth early start to the Bush Administration will give end consumers the confidence to re-enter the home buying, auto buying and appliance buying markets. “There is a good possibility that business is not as bad as some in the industry have been projecting, and that some of these companies will be looking for scrap again soon.”

POWER OUTAGE

A major disruption not just to overall demand but to established buying and selling patterns has been the energy crisis that has escalated costs and even affected supply in the western U.S.

Primary smelters, secondary smelters and even aluminum sweat furnaces have been shutting down due to increased energy costs or reduced supplies.

In the western U.S., large operations such as Kaiser Aluminum facilities in Washington, the Golden Northwest smelters in Washington and Oregon, and Columbia Falls Aluminum Co. of Montana have been shutting down or cutting back operations and re-selling their power at a considerable profit to hungry energy consumers.

Columbia Falls was among the most recent producers to reach an agreement with the Bonneville Power Administration (BPA) to close its potlines in Columbia Falls, Mont.

The company halted its operations in late January, in a deal that freed up additional power all the way through the final quarter of 2001.

While cutting energy deals has helped some aluminum companies make a profit under difficult circumstances, many smaller operators (and those away from the Pacific coast) have not been presented with this option. With natural gas costs up sharply throughout the country, operators of aluminum sweat furnaces and other equipment used to convert aluminum scrap into other forms have seen their profit margins melt faster than the scrap inside the furnace.

One Southeastern scrap processing company reported shutting down its sweat furnace after natural gas costs tripled, erasing profit margins. “As an operator of a sweat furnace or smelter, you look at what is within your control and what is not, and natural gas prices are not,” says Rifkin. “High energy costs can kill a margin that is thin to begin with.”

Aluminum recyclers have always touted the energy efficiency of recycling versus smelting primary products from alumina. It remains to be seen whether a significant energy price hike will ultimately help the competitive position of primary producers. For now, the situation is still fairly bleak.

“There is a definite compression in the spreads between scrap and ingot,” notes Rifkin. “A lot of secondaries are not making any money and certainly not getting a return on their investment right now. What has happened with energy prices has been the straw that broke the camel’s back.”

DESTINATION DYNAMICS

Should aluminum scrap demand escalate again before the end of 2001, some of that demand may be coming from different directions.

The final quarter of 2000 saw a major destination for some forms of aluminum scrap come online: the Norsk Hydro Aluminum plant in Henderson, Ky.

Up to 90,000 metric tons per year of secondary aluminum billets will be produced at the plant, which is attempting to capture scrap from the customers who use those same billets. With chemistry a key to its melts and its attempt to produce “primary quality” secondary billets, setting up such a scrap routing system has been a priority at Hydro.

The new destination may replace several others that could be lost if secondary smelting is in as much of an overcapacity situation as industry observers believe. In September of 2000, secondary smelter Keystone Aluminum Inc., Mars, Pa., shut down its furnaces, while in January of 2001, Wabash Alloys notified state and union officials that workers at two of its plants could face layoffs in 60 days.

With long-term aluminum demand trends being fairly positive, it is likely that any overcapacity situation in the industry is not nearly as severe as what is perceived to exist in the steel industry.

Scrap dealers can also hope that, even if domestic scrap destinations decline or stagnate, the export market could soak up additional scrap supplies.

“If the Pacific Rim economies and the value of key currencies increase against the dollar, material will be able to flow much faster out of the country,” says Sax. Additionally, if nonferrous scrap export duties are adhered to in Russia, “that could slow down their flow to western Europe and let North American scrap in,” he comments.

Regarding the U.S., “right now consumer confidence is relatively low and stock market declines have caused retirement funds to look smaller,” says Rifkin, “plus heating bills are high and reports are circulating about layoffs. Until they feel better about how things look, this is what will hold the economy back.”

As economic policy is formulated, those in the aluminum business should be able to take some comfort in the fact that one of their own should occasionally have the ear of the President.

“You’ve got an aluminum guy (former Alcoa CEO Paul O’Neill) sitting in the Secretary of the Treasurer’s office,” Sax remarks. “He should be very conscious of the metals business, so that’s on the plus side.”

A friend in high places may not be necessary to return the aluminum industry to good times, but it can’t hurt. RT

The author is the editor of Recycling Today .