July/August 2013
North American aluminum scrap consumers are pinning their hopes on the automotive market’s continued growth and innovation while other major markets recover more slowly.
By Helen Burnett-Nichols
The past five years have not been easy for many in the North American secondary aluminum industry. Back in 2009, as the United States began its slow ascent out of the recession, overcapacity, bankruptcies, and competition for material from overseas buyers created some of the most challenging conditions scrap consumers had ever seen. Two of the stalwarts of North American scrap demand, the automobile industry and domestic housing construction, have spent these last few years languishing well off their pre-recession highs. But a steadily improving domestic economy is now bringing signs of health to these crucial segments, with automakers in particular increasing production, and vehicle innovation looming large on the horizon.
With the demand picture seemingly on the mend, is the secondary market expecting better times in 2013 and beyond? The answer, market participants say, is not that simple. The secondary aluminum market might, in fact, be back to normal times, but normal is not the same as good. Many contend it’s simply a different year with the same problems: supply woes and tight margins. As Matt Kripke, president of Kripke Enterprises (Toledo, Ohio), puts it, “Every time we think we’re out of the woods and demand has recovered … it seems like we hit a hiccup.”
Cautious Optimism in Major Markets
One of the bellwethers on which the health of the secondary aluminum industry rests, the automotive sector, is showing signs of continued recovery, although some worry this recovery remains fragile. Total U.S. motor vehicle assemblies climbed more than 8 percent in the first quarter of 2013 compared with the fourth quarter of 2012, according to U.S. Federal Reserve data (Washington, D.C.). WardsAuto (Southfield, Mich.) recently increased its production forecast for light vehicles for this year and next; it now expects North American production to reach 15.95 million units this year—a 3-percent increase over 2012—and to jump to nearly 16.5 million units in 2014. As for the individual automakers, Ford Motor Co.’s (Dearborn, Mich.) second-quarter 2013 production goals in North America were 9 percent higher than they were in the same quarter last year. “This automotive sector has been so buoyant,” says Jerry Golden, president of Rochester Aluminum Smelting Canada (Concord, Ontario), that “I’m concerned that it will maintain its momentum. I hope it does,” he adds, because this sector is supporting the entire secondary aluminum industry right now.
Fortunately, demand for die-cast alloys and for wrought alloys for lightweighting in the automotive sector has been positive in recent months, explains Walt Drosdick, senior metals trader with Triple M Metal (Verona, N.J.). Further evidence of the strong demand from the auto industry comes from Novelis, which previously announced an increase in prices for its automotive aluminum sheet products in North America. The company is rapidly trying to ramp up production to meet expected demand for finished product and the scrap returned from the manufacturing process, says Silverio Colalancia, director of recycling for Novelis North America (Atlanta).
Many on the secondary aluminum supply side are watching certain automakers’ concept vehicles with a lot of interest, Kripke says. At least one company reportedly is planning a redesign of its truck that will feature a body that’s largely aluminum. If the public is willing to pay more for such a truck to get improved fuel efficiency, that becomes a game-changer for the secondary industry, he says. “We’ve been slowly, over the last 20 years, taking a little bit [bigger] piece of the pie of the automotive market, and then, all of a sudden, you have a quantum leap,” he says.
Another trend the secondary aluminum industry is watching is whether the average life of the North American automobile will continue to increase. The average U.S. car was a record 11.2 years old in 2012, according to auto industry information provider Polk (Southfield, Mich.), up from 9.6 years old in 2003. Ted Lehmann, vice president of Americas metal procurement for Aleris (Cleveland), wonders whether that longer life is a result of technological advances or a result of the U.S. consumer delaying automotive purchases because of the recession. “If that average life of the car stays [the same] or stops increasing or goes down, that would indicate to me that there’s likely to become a significant increase in scrap back to the secondary market,” he says.
Other secondary aluminum markets seem to be improving as well, though gains in these sectors seem to have had negligible impact on aluminum demand. Take the domestic housing market: Housing starts climbed 13.9 percent in March, year over year, according to the U.S. Census Bureau (Suitland, Md.), and they were up 28 percent in 2012 compared with 2011, reaching their highest level since 2008. But a large part of this gain took place in multi-unit building construction, which does not really affect the demand for building sheet for siding, gutters, and other secondary aluminum applications, says Lloyd O’Carroll, an analyst at Davenport & Co. (Richmond, Va.).
The industry also is hoping for continued recovery in the commercial building market. Although nonresidential construction grew 7.5 percent from 2011 to 2012, it has yet to recover to levels seen in 2008 or even 2009, according to Census Bureau data. “Commercial building has been dead for several years,” says Stephen Moss, vice president of aluminum scrap brokerage firm Stanton A. Moss (Haverford, Pa.). “Until the commercial real estate market revives and new large-scale projects start getting funding again, it will be a weak market. But I think the companies that supply that market have adjusted and are surviving right now.”
One more positive sign is that U.S. shipments of major appliances—another market for aluminum scrap—are on the increase, up 5.8 percent in March 2013 compared with March 2012, according to the Association of Home Appliance Manufacturers (Washington, D.C.).
Supply Challenges
Despite these seemingly favorable conditions for metal demand, aluminum consumers face an extremely competitive situation on the supply side and are waging the same battles they always seem to fight, Drosdick says. “The lack of scrap made it a seller’s market for most of this year and [created] a bidding war to get it, [which] just bids away the margin,” he says.
According to data from the U.S. Geological Survey (Reston, Va.), in 2012, about 3.4 million mt of aluminum was recovered from purchased scrap, of which 53 percent came from new manufacturing scrap and 47 percent from old scrap. This is broadly similar to 2011, when 3 million mt was recovered. And in volume terms, the first quarter of 2013 looks identical to the first quarter of 2012, Kripke says. The availability of scrap is the biggest issue facing consumers at the moment, says Marc Rose, president of the industrial recycling division at Schupan & Sons (Kalamazoo, Mich.). “I get calls from consumers on a more regular basis, rather than me calling them, and that usually hasn’t been the case,” he says.
The reasons for the tightness in scrap supply have stymied many in the industry. Some point to the fact that industrial production hasn’t yet recovered to prerecession levels, resulting in less of the type of high-quality scrap companies are interested in. “It seems like there are more consumers fighting for the same grades of scrap than there were four years ago,” Moss says. Consumers are having to pay significant premiums to get the scrap they need to make their products, Kripke says. “What I read into that is, demand is very healthy,” he says. Consumers “would take the opportunity to lower prices if they could, and they just can’t do it.”
Alan Dick, president of Alpert & Alpert Iron & Metal (Los Angeles), also points to the aggressive targets various industry players have set in the past four years relative to the level of scrap consumption. This has resulted in a much greater focus on scrap use globally, he says. When you add to this the recent low aluminum prices on the London Metal Exchange—they fell by $300 a mt between January and mid-June—there is a very difficult scrap flow on the nonindustrial side, Dick says.
With scrap dealers tending to hold their material in a sliding market, consumers are tightening their spreads in the hope of attracting material, Rose says. Otherwise, he points out, they will have to substitute prime. That could bring its own issues, Kripke says—namely, the potential for tightness to eventually move into the prime market as well.
Many agree that the supply difficulties this time around are not primarily the result of competition from overseas scrap buyers, as they were in 2009. According to tariff and trade data from the U.S. Department of Commerce and the U.S. International Trade Commission, both in Washington, D.C., China’s share of U.S. aluminum scrap exports stayed flat from 2011 to 2012, at 69 percent, which was about 1.5 million mt in 2011 and 1.4 million mt in 2012. That would be only the second drop in annual exports from the United States to China since 2003, with the other exception being 2009, when exports dipped during the recession.
Export prices are currently lower than domestic prices, and the market isn’t seeing a lot of activity out of China, Drosdick says. “They don’t seem to be as intense in their demand pull as in the past. So most of our metal right now is staying at home,” though he notes that a few grades “always go abroad.” Whether the slowdown in demand is a result of slower-than-expected growth in China or tighter inspections of incoming material, the result is the same: For now, at least, China’s demand for scrap is still significant, but it’s not as strong as in recent years. Indeed, with China seemingly getting tougher on the quality of scrap imports, it’s unclear whether the Chinese market for low-grade, unsorted material will continue or grow further, O’Carroll says.
In some respects, ongoing supply issues in the North American scrap market hinge on what happens in China. For the past 10 years, that country was exerting “a pull on [the] type of scrap which would primarily go to the secondary industry,” Lehmann says. If China’s demand does not return, the result could be a significant amount of additional scrap availability in the United States, he says.
Not every consumer is having supply difficulties. With Novelis’ regional diversity, the company generally is able to get what it needs, Colalancia says. On the used beverage container side, after the company’s Evermore joint venture with Alcoa came to an end last year, it set up a new organization that reportedly made it the largest UBC buyer in North America. “We have not had an issue in North America getting scrap inputs,” he says. “Over the last couple of years, we’ve seen our inputs actually grow by about 20 percent overall.”
Adjusting to a Changing Market
Whatever the reason for the supply shortage, secondary producers might be exiting the market—shutting down production at least temporarily—because margins are just too compressed, O’Carroll says. “There’s a lot of secondary producer capacity out there, [so when] prices are weak, margins get squeezed, [it causes] a lot of problems for [them],” he says. Indeed, one consumer says he has looked at temporarily closing his facilities: He plans to take a maintenance shutdown in one of his plants and idle some furnace capacity. Moss confirms he’s seen some whittling down of excess capacity in recent years, but, he points out, often something new will open to fill its spot. As a result, he says, it’s difficult for secondary alloy suppliers to succeed in this market.
With the low cost of adding capacity continuing to exacerbate the situation, adaptability might be the only factor keeping companies afloat. Those that have survived the downturn are trying to be smarter and work better with their suppliers, Moss says. Also, after tightening credit terms during the recession, companies are getting more comfortable extending credit again. “It seems like most of the consumers out there are trying to widen their payment windows,” Moss says. “Some are doing it more successfully than others because they figure, ‘Well, money is cheap, let’s try to shift that burden to the shipper’ versus to themselves.” At the same time, with today’s rapidly fluctuating commodity prices, both consumers and purchasers are hesitant to lock into any long-term spread agreements, Dick says. “If you lock in, and then there’s a significant change [in prices] over the next 12 months, usually one side really benefits.”
Segregation “will be important as we see the next generation of aluminum applications [for] auto bodies,” O’Carroll says. “It will be important for the auto companies to keep that [material] segregated so [it] can go back in [to production], and that increases economic value.” Novelis, for example, has been introducing a broader array of scrap, over and above UBCs, into its system over the last four years to reach its goal of 80-percent recycled content by 2020. In doing so, it intends to keep “like products” with “like destinations,” Colalancia says. Accordingly, on the processing side, the drive to innovate and segregate materials is increasing, Drosdick says, with companies looking to upgrade the scrap that comes in the front gate. “I think the companies that innovate well in that area will do well,” he says. “They’ll find a way to build a better mousetrap, and that technology keeps you ahead of the curve—it’s your advantage.”
Capacity expansion related to the North American auto sector might lead some rolling mills to change their production mix to automotive from nonautomotive applications, Dick says. Even if that happens, however, “if the automotive sector consumes aluminum at the pace that many believe it will over the next 10 years, we may still be in an undercapacity situation,” he says. At the same time, a widespread exodus from nonautomotive applications “might cause some pinch points in the supply chain for some other sectors,” he says, but he contends this is a good thing. “I think the story for aluminum is very bullish overall,” but “the people that are participating in the market may have a different portfolio or a different product mix in the next five to 10 years than the one they have today.”
Another change is the seemingly declining popularity of the LME’s North American Special Aluminum Alloy Contract. Aleris is one of the companies that has discontinued its use of the index in aluminum pricing, switching to other indices and mechanisms that it says “provide a better and closer correlation to the cost of aluminum scrap” it uses in the products it offers to its specification alloy and recycling customers. “The NASAAC is a contract that doesn’t fundamentally work for a secondary smelter to be able to price and appropriately hedge its products so that it can make an acceptable return, and that is essentially why we have stopped doing it,” Aleris’ Lehmann says.
Part of secondary producers’ issue with NASAAC, Dick says, is that there is very little additional value, from a manufacturing standpoint, in the products they’re selling to the automotive industry. “When you’re selling to the die-casters or to the [original equipment manufacturers], you’re selling them A380,” he explains. “There are not large conversion premiums put in there like you would find if you were making a flat-rolled product or an extruded product.” That’s why “the price of the raw material as a proportion of the overall selling price is extremely high,” he says. “Consequently, it’s important that the price mechanism on which you sell is able to reflect what is happening in the raw material market, and I do not think the Platts 380 nor the NASAAC reflect what happens in the scrap market.”
With many questions remaining as to what the future holds for the supply side and a precarious demand recovery, many processors and consumers remain cautiously optimistic through the end of 2013 and into next year—with the emphasis on caution. The start of 2009, when volumes dropped 50 to 80 percent, year on year, due to pricing and supply issues, was about as bad as he thought it could get in the scrap aluminum market, Moss says. “We’re vulnerable to that happening again. And, hopefully, people remember those times” and plan accordingly, he says.
Helen Burnett-Nichols is a writer based in Hamilton, Ontario.
North American aluminum scrap consumers are pinning their hopes on the automotive market’s continued growth and innovation while other major markets recover more slowly.