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Aluminum ‘scrap gap’ hurts bottom lines: execs

Jan 15, 2014 | 09:56 AM | Michael Cowden

Tags  aluminum scrap, scrap, LME, P1020, Ted Lehmann, Aleris International, Kevin Ferguson, Alexin China

FORT LAUDERDALE, Fla. — The United States is structurally short of aluminum scrap and may never see metal margins return to peaks last seen in 2005-2006, according to industry executives.

The scrap squeeze comes as manufacturers increase recycled content, processors become more adept at separating material to meet China’s "Green Fence" requirements and scrap inflows have stalled with low London Metal Exchange prices, executives said.

In addition, an expansion in U.S. manufacturing activity has worsened the shortage because production now consumes more scrap than it generates, they said.

"On the mill side, since 2011 there has been a significant drop in the spreads relative to P1020," Ted Lehmann, vice president of metal procurement for the Americas at Cleveland-based Aleris International Inc., said Jan. 14 at the Platts Aluminum Symposium in Fort Lauderdale, Fla. "It’s structural. It’s here to stay. It’s going to be here for years. We are not going back to 2005-2006 (spread) levels."

Spreads will likely widen if LME prices go up but probably won’t return to levels seen in the mid-2000s, Lehmann said, adding that the slowdown in exports resulting from Green Fence is likely to prove temporary.

Another reason that previous wide spreads are unlikely to return is that the 2006-2008 commodities "super-cycle" and high LME prices brought a decade’s worth of scrap out of garages and basements that was turned into cash. "You can only do that once. And then it has to build for another decade or two," he said.

In addition, cars today last longer and take more time to enter the scrap stream while more companies are looking to "close loop" their own scrap, Lehmann said.

Kevin Ferguson, vice president of procurement at Bluffton, Ind.-based Alexin LLC, blamed the tight scrap situation in part on limited availability of prime P1020 remelt ingot, increased competition from corporations looking to be more "green"—including the automotive sector—and some scrap dealers hoarding material as they bet that LME prices have bottomed and wait for them to improve.

Ferguson recalled a scrap supplier approaching Alexin with material but refusing to part with it. "I’m not ready yet. I want to see the LME get back over $2,000 (per tonne) before I sell it," he recalled the supplier as saying. "They feel that this market has hit a true low point, and they’re waiting for it to come out—and they don’t have to sell it because they own."

But Ferguson and other speakers also questioned how widespread that phenomenon might be given the risks associated with sitting on inventory, including it getting dirty, stolen and losing value.

Walt Drosdick, senior aluminum trader with Giampaolo Group of Cos., Brampton, Ontario, maintained that the tightness is largely a result of the unintended consequences brought by manufacturers to boost recycled content in manufactured products.

Because of the push to use scrap instead of prime, "the U.S. economy now has a structural predisposition to tightness in scrap supplies, and this condition has become a new driver between tight scrap spreads and a new source of scrap volatility," he said.

Before 2007, manufacturers helped to create their own supply because scrap generation increased with increased production, Drosdick said. But in the following years, in 2012 for example, manufacturing activity—because of increased scrap usage—has instead reduced scrap supplies, he said.

"The result is that the manufacturing sector has become a formidable drag on scrap supplies," Drosdick said. And there is no easy solution to the "scrap gap" besides an increasing inflow of obsolete scrap, decreased exports or increased use of primary metal, he said.

"High recycling content in manufactured products cannot be sustained if total scrap flows out of the pipeline more than inbound flows," he said.

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