September/October 1992
Executives from across the Atlantic share their perspectives on the LME secondary aluminum contract, the use of aluminum castings in automobiles, U.S. access to the common market, and more.
BY SI WAKESBERG
Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.
When the London Metal Exchange (LME) began investigating the potential for a contract for trade in secondary aluminum in 1990, the project quickly became one of the hottest topics in the world of metals. Now, with forward trading set to begin in October, even more voices have joined the discussion.
Here's a European perspective on the birth of secondary aluminum trade on the LME and other events determining aluminum's direction abroad.
Poised for Forward Trading
The secondary aluminum contract goes into effect Oct. 6 for forward trading and Jan. 4, 1993 , for cash. Preliminary rules note that alloy conforming to U.S. A380-1, Japanese ADC 12, or European DIN 226 specifications will satisfy the contract, which also requires that each lot be produced by a single plant and be wrapped in zinc-coated strapping in bundles of 1 ton or less. The contract will trade in lots of 20 tons and up to 15 months forward.
A preliminary list of warehouses expected to be approved as delivery locations for the secondary aluminum included sites in Germany, France, Italy, and the United Kingdom. In the United States, applications from warehouses in Gary and Jeffersonville, Ind., have already been approved, and facilities in several other regions had applications pending as of this writing.
One nation conspicuously missing from the list is Japan, where the aluminum community has voiced broad and steadfast opposition to the LME contract. According to Martin Abbott, the LME's director of marketing, before the exchange can site an appropriate warehouse there, the Japanese government must waive its storage time limits. Although the LME received such a waiver for its primary aluminum warehouses in Japan, Abbott notes that siting of Japanese warehouses is likely to be delayed.
The pending contract was authorized by the LME's board of directors in May following long consultation with industry groups around the world. Opposition has been raised by some secondary aluminum smelters in the United States and Europe, as well as Japan, but LME officials believe that alterations made to the proposed contract with industry input, such as those related to iron content, ingot weights, and size ranges, will ease the concerns of those lacking confidence in the proposition. And, by August, the LME was able to report that it had already approved 24 brands of secondary aluminum from several countries as acceptable for delivery under the contract.
Sorting out the Views
Still, industry opinions of the contract seem mixed—ironically even within related corporations. Dominique Arnaud, president of Pechiney Trading Corp. (Paris), speaks in favor of secondary trade in aluminum on the exchange, insisting "the LME contract is a good thing since it will give companies an opportunity for hedging on the exchange."
On the other hand, Jean Marie Pache, a director of Aluminum Pechiney (Paris) and president and director-general of Affimet (Compiegne, France , a subsidiary of Pechiney, has voiced concerns about the contract. Pache, who heads Pechiney's major secondary aluminum division, says "most French smelters are against the contract," and notes that he believes the Organization of European Aluminum Smelters (Dusseldorf, Germany) has a similar position.
Pache is concerned that "there will be difficulties in hedging" with secondary aluminum because, he says, scrap grades simply can't be properly "linked" with primary aluminum.
Another issue worrying smelters, according to Pache, is that "secondary aluminum can't be stored for too long because of the humidity factor," which allows oxidation to occur. Indeed, warrants—receipts from authorized warehouses giving title to a physical commodity—for the secondary aluminum will contain warnings regarding moisture problems. Nevertheless, the LME reports, warehouses approved for delivery under the contract "must undertake to prevent moisture collecting on the stored material."
Pache says air-conditioned warehouses will not solve the problem, but the LME's Abbott told Metal Bulletin that exchange officials believe that they can reduce the seriousness of humidity concerns to a "marketing rather than a technical factor." Using warehouses equipped to protect the metal from moisture, however, will boost storage charges for secondary aluminum to 10 to 25 percent higher than those for prime metal, he notes.
Another concern—and one raised especially by some Japanese smelters, according to Pache—is suspicion that the contract will lead to price volatility for scrap aluminum. According to the July 31 American Metal Market, however, the approval of several Japanese brands of secondary metal has generated increased Japanese interest in the contract. In fact, the daily metals paper reported, opposition in Japan "seems to be changing rapidly."
The Pulse of European Aluminum
As European aluminum executives await the new secondary contract, they must also deal with other market trends facing the industry, including these:
The burden of overcapacity. "The secondary aluminum industry needs to produce at capacity in order to be profitable, but this, unfortunately, has resulted in overcapacity," according to Pache, who notes that in France there are about 20 secondary aluminum smelters with annual production capacities ranging from 2,000 to 40,000 metric tons per annum.
As a result of this overcapacity, Arnaud indicates, some European smelters have already shut down and others may follow suit if demand doesn't pick up soon. New European capacity, he emphasizes, is "zero," and Pechiney has been forced to implement cost-saving measures to withstand this recessionary period.
A scrap shortage. The overgrown European secondary aluminum smelting industry has a large appetite, Pache points out. Because the European Community is not scrap self-sufficient, he explains, Western European smelters had been purchasing scrap from the Soviet Union and the Eastern Block. "Transport difficulties" in those nation's successors, however, "have limited the intake of such scrap this year," Pache reports, noting that aluminum scrap attention is now focused on the United States .
Production moves east. On the flip side, notes Arnaud, "Aluminum production has moved from the West to East Europe —and the aluminum produced is coming back to us," complicating the problem of oversupply. Although the same transportation problems in the former Soviet republics that are limiting scrap trade might stall the troubling flow of Russian aluminum into the West, the powerful need for cash in the republics makes it imperative for them to ship as much metal as they can, Arnaud notes. Still, he wonders aloud, "Can they continue producing at their former pace?"
Following the auto industry. A large portion of the aluminum scrap supply in Europe goes into products related to the automobile industry, so secondary aluminum smelters there must carefully watch automakers' moves, Pache explains. "During the 1980s, there was a sharp increase in European automobile output," he says. "This high production rate has had to come down to more normal levels and I expect this to be a trend in the 1990s.
Nevertheless, other European aluminum executives stress that the automotive industry has great potential for aluminum: "The biggest ultimate end use of secondary aluminum is the automotive industry," reports Andrew O. Smith of Cookson Aluminium Ltd. (Derby, United Kingdom). "At present, the amount of aluminum in a passenger car produced in Western Europe is approximately 50 kilograms, mainly in the form of castings. The amount of aluminum castings is forecast to increase significantly."
Long-term direction. With demand for secondary aluminum predicted to grow down the road, while scrap supplies are expected to remain limited, will European producers be able to keep up in the long run? Arnaud does not expect any aluminum shortfall in the 1990s, although he admits that a deficit in the European Community is a possibility. Sufficient supplies from other aluminum-producing countries—particularly those in South America —however, could take care of any temporary deficit, he says.
European UBCs. Asked about the role of aluminum used beverage containers (UBCs) as secondary smelter feedstock in Europe , Pache notes that UBC consumption is minor in most parts of the continent. "European aluminum producers have not gotten involved in UBCs the way they have in the United States," he says. "Only in the United Kingdom are they making any headway."
Scrap-quality demands. With the growing importance of secondary aluminum in the automobile industry, quality standards are becoming more stringent all along the line, according to Cookson's Smith. French aluminum consumers have reportedly already adopted a "quality rating" approval system for scrap suppliers because the demands of automatic quality systems have exerted considerable pressure on foundry ingot suppliers.
Common Market access. Arnaud believes that the European Community's Common Market—which is expected to be fully established early next year—will not be "closed" to U.S. business interests. "I think business will be taken care of by traders through swapping," he said, noting also that some U.S. producers also are already participating in Common Market activities.
Environmental expenditures. Environmental concerns of the European metal industries will increase in the mid-1990s because of the growing political clout of Green parties and environmental groups in many European countries, Arnaud points out. In fact, he adds, financial expenditures to fight pollution is likely to be a "major activity of aluminum companies in the 1990s."
Market fundamentals. Arnaud reports that he has seen no signs of an increase in aluminum demand and notes that the declining value of the U.S. dollar has been a factor in recent swings in aluminum prices. He predicts prices "slowly moving back up by the year's end."
Looking ahead, Pache says he does not expect the LME spot price for aluminum to show any material change in the second half of the year, nor does he expect prices for secondary metal to improve, simply because of sluggish demand. Because "scrap follows the prime market," says Pache, aluminum scrap prices are also unlikely to move higher.
As the year rolls to a close and totals are tallied, 1992 is likely to wind up similar to 1991—nothing to write home about—says Arnaud. "We hope," he adds, "1993 will turn out to be a better year, not only for our company but for the entire aluminum industry."
Editor's note: Martin Abbott will speak on the LME's secondary aluminum contract at the Aluminum Roundtable sponsored by Scrap Processing and Recycling on Sept. 24 at the Marriott O'Hare in Chicago. Additional speakers will include Robin Adams, president of Resource Strategies Inc. (Exton, Pa.); Eugene Greenberg, vice president and general manager of raw materials for Commonwealth Aluminum Corp. (Louisville, Ky.); Leo Horowitz, president of Coremet International (New York City); and Joseph Viland, president of Wabash Alloys (Wabash, Ind.). Call 202/466-4050 for details.
Executives from across the Atlantic share their perspectives on the LME secondary aluminum contract, the use of aluminum castings in automobiles, U.S. access to the common market, and more.