Stealing a Profit from Aluminum Scrap

Crooks in the Washington, D.C. area may know as much about profiting from the aluminum scrap market as many of the legitimate dealers in the country know.

Puzzled school officials at one high school walked out to their stadium at the end of last fall’s football season, only to find that someone had removed all of the aluminum seats from the bleachers. Local police concluded that the bleachers had been stolen and sold for scrap. If the bad guys are turning to aluminum scrap to make a profit, things must be pretty tough in the crime business, too.

Aluminum prices surely are not what attracted the criminals. Throughout the industry, the price of aluminum scrap is low and movement of product (outside of the midnight market) can best be described as slow to sluggish.

There may be reason for optimism as the year progresses—and that is keeping the market going through the late winter months.

“Near-term, things are very tough,” says Mike Rubin in the purchasing department at the David J. Joseph Co., Richmond, Va. “It is very difficult getting scrap. And, prices are depressed. Right from the grass-roots level, the market is slow.”

Rubin says he does not feel there is a lot of hoarding because of the lower prices. He simply sees a market overburdened by way too much aluminum in the London warehouses. “They’re plumb full,” he says. This continues to put downward pressure on the LME (London Metals Exchange) price, where stocks seem to threaten to push the roof right off the warehouses. To make the LME price situation even worse for U.S. dealers, there is the transport premium to deduct from the LME price.

However, not everyone is blaming the LME. Barry Cohen, vice president of purchasing at Allied Metal Co., Chicago, says he feels the weak iron market is more to blame than the futures market. “The price of scrap is good even though the LME is not good,” he says. “For once, the situation is due to supply and demand” and not speculators, he adds.

“One of the main reasons you have to scratch to supply the secondary market is the price of iron,” he explains. Since the price of iron is low, demand for automotive iron has slumped. “Iron is not coming to the shredder,” he says. Much aluminum and other scrap is generated after the iron component is removed from the car. With the slowdown in recovery of iron from autos, there has been a parallel slowdown in aluminum recovery.

Jim Diamond, vice president/metal purchasing for Wabash Alloys, Wabash, Ind., agrees that a lack of shredded autos is largely responsible for the shortfall in the aluminum market. He sees some effect of the “Asian flu,” but—as a consumer of aluminum scrap—feels he is getting what he needs. “Aluminum scrap is flowing adequately, not well,” he says. “There is enough to get us through the day.”

He expects the supply and price situation to continue to improve modestly through the second quarter. “There is a light at the end of the tunnel,” says Diamond. “It’s the end of the second quarter. The real challenge is that we need to get to the end of the second quarter.”

Cohen also is moderately optimistic. “Iron is starting to move a bit. This will straighten itself out.”

Nick Adams, director of statistics and economics for the Aluminum Association, Washington, D.C., says that, over the long term, the auto market could become a bright spot in aluminum recycling. Although it will take several years to show up in the recycling loop, today’s auto has 250 pounds of recyclable aluminum in it.

Despite the slowdown in both auto-related aluminum recovery in the Great Lakes region and the vagaries of the UBC (used beverage can) business, record amounts of aluminum continue to pour out of the former Soviet Union. Meanwhile, there are no technical pressures in any significant section of the market driving demand for either primary or scrap material.

Earlier there was some hope that Japan, traditionally a major consumer of aluminum, would perk up its demand for aluminum. Sadly, Japan is predicted to use even less aluminum in 1999 than it did in 1998, and individual companies are talking cutbacks of as much as 10% below last year’s levels. The rest of the region, including southeast Asia, is probably going to fare worse.

But Alan Alpert, president of Alpert & Alpert, Los Angeles, says that there has been some scrap moving into Asia. He noted a bit of an upturn in both the Asian market and in the domestic market. “There is not a lot of scrap available,” he points out. He downplays the notion that there is scrap available that is being hoarded.

“It is more related to the generation of scrap materials,” he says. “We’ve seen cutbacks in aircraft. And there is the general malaise in the market.”

FLAT UBCs

Both the UBC  and non-UBC markets are weak. Beverage containers remain a significant portion of the aluminum business. In the United States, consumption of aluminum for cans is projected to be flat.

The street price is one factor. Any time cans get down to the penny-per-can price range, the incentive to collect and process is weak. In addition, lighter cans mean fewer overall tons are processed.

Although can shipments for the span from October 1997 to October 1998 are up 1.6%, recycling rates of UBCs are down. “If recycling rates were going up, that figure would be higher,” says Adams. As it is, UBC recycled tonnage is off 6% to 7%.

According to the U.S. Geological Survey, through November, scrap consumption was down 4.5% and metallic recovery was down 6%, roughly paralleling the Aluminum Association’s figures. Some speculate that material is being held back, although others say it is unlikely.

“Cans cannot be warehoused on the LME,” Michael Kirk, Golden Metals Trading, Littleton, Colo., points out. “They come out when they are needed.” He says that he thinks the market has seen some freeing up of stocks since the end of 1998.

Prices on UBCs have been bid up to the 48-49 cent range when needed. Then, they drop back to the 42-43 cent range.

Adams points out that curbside collection systems are fairly insensitive to price. Likewise, deposit states are going to return the same nickel or dime whether the price of UBCs is 20 cents or $2.

When the final figures were in for 1997, they showed a surprising increase in the recycling rate. There is a chance that the same thing could happen with the 1998 figures, although it is less likely.

Kirk, who describes himself as “always optimistic” agrees that there has been a slowing down of the movement of the physical material. He says the blame should be shared by the typical winter doldrums and the lower prices. “A lot of dealers and peddlers don’t want to cut loose yet,” he says. He notes that material flow is usually weaker in the winter months. “In the summer and fall we will have better markets. Right now we’re skipping along the bottom, but that will turn around later in the year,” he adds.

On the West Coast, Alpert says UBCs represent a decent market. The beverage can is almost totally domestic, of course. In February, cans were selling in the low-40 cent range. Alpert said he does not have a long-term prediction for the UBC business. “I base UBCs on a five-minute plan, not a five-year plan,” he says, referring to making a quick turn on cans whenever the market loosens up a bit.

One place where UBCs definitely are getting tighter is in the area of quality control. Plants are becoming more quality-minded and penalties for contaminated loads are becoming larger and more frequent.

Since many recyclers have cut back on their costs as prices slumped, a number of plants are working with a depleted labor force. The remaining line workers can not, or are not, paying as much attention to quality as they did in the past and more low-quality material is slipping out of the yards.

Given that it is a buyer’s market, purchasing consumers can afford to be quite strict about their UBC quality guidelines.

Things are not so quality-conscious in the general scrap market. “Quality scrap is an oxymoron,” Diamond says of the attitudes of many in the scrap market. “Scrap is scrap.”

OVERSEAS MARKETS

Almost everyone agrees that anything that lights a fire under the export market could provide the push needed to get the aluminum scrap business back in high gear. One reason for Kirk’s optimism is that he expects demand in Europe and in Asia to improve as 1999 wears on. By the end of the year, he sees overseas demand taking up some of the market excess.

Most observers dismiss the current problems in South America as insignificant. By world standards, the currency problem in Brazil is small potatoes. After the United States, it is Europe and Asia where the markets look for strength. Asia continues to be a dead market.

While several other market watchers agree that the European market may see some growth, their figures say that, in Japan and elsewhere in Asia, consumption is projected to be minimal throughout the year.

Kirk sees it in a different light. “It will take longer for the Pacific Rim to recover than Europe,” he admits. However, he says there is incredible pent-up demand in Asia, and he expects Japan to get its financial house in order.

One early bullish tidbit: containers to Asia from the West Coast were available in February for $200 to $400. With shipping that cheap, the odds are better that some manufacturers might just start to nibble around the export market and move some material across the Pacific.

This will not happen immediately, he cautions. However, he does see hope for a fair Asian manufacturing recovery by the end of the year.

According to Bob Garino, director of commodities for the Institute of Scrap Recycling Industries Inc. (ISRI), Washington, aluminum actually has done pretty well in the export market when contrasted to other commodities. Iron is off about 40%, stainless is down 25%, and copper is about 20% off. Aluminum exports, by contrast, are up a tad.

In the United States, it is not manufacturing that is the problem. “It’s the door trade at the dealer that is the problem,” Cohen says. He notes that die casters in the Midwest are busy. “Scrap is tight due to the retail trade,” he maintains, referring to the slow peddler traffic.

DOWN THE ROAD

“Secondary recovery is down, recycling rates are down,” Adams says. Noting that there is a tendency to build stocks in anticipation of price gains later on, he notes that scrap prices certainly will go no higher than the price of primary material. Although some material (such as that going directly into the foundry business or to steel mills as flux) is not reported, overall rates are down.

Still, there are glimmers of hope. Diamond notes that the price of aluminum scrap had improved two to four cents from the start of the year and expected it to continue to inch up. He reminds that the market had to deal with a major snow storm which extended across the country and into the Northeast during the early part of January. “That caused a crunch,” he says. Once the snow melted, metal started to move again. He says he expects continued modest improvement as the year wears on.

While Kirk also maintains that things will get better, he says that a return of prices to the 48-49 cent range for UBCs are about as good as things will get looking through to the end of 1999.

Still, that’s a 10% increase over the winter price and—given the way pricing for several other types of metals have been performing of late—represents almost a surge in prices.

MAINTAINING A SENSE OF HUMOR

Alpert says his big fear is what the overhanging stocks on the LME will mean to prices. “I certainly think things should improve,” he says. “The U.S. economy is improving, so things should get better.” He also has a contrarian strategy, however.

“Buy Internet stocks,” he quips. “Forget about aluminum.” He notes that a purchase of 1000 shares of AOL stock for $11,500 back in March 1992 would have grown to 64,000 shares valued at $5 million today. “Why play with aluminum scrap?” he asks.

Rubin might agree. He says he sees no reason to expect big improvement, either in the short-term or as 1999 rolls through Spring. “My best advice is to go to church on Sunday and to synagogue on Friday,” he says.

The author is an environmental writer and Recycling Today contributing editor based in Strongsville, Ohio.