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Scrap dealers worried Aleris may alter buying

Mar 27, 2014 | 04:50 PM |

Tags  Aleris, Nichols Aluminum, Davenort Old Sheet, DOSA, Old Sheet, Aluminum Scrap, LME, iron Cleveland

NEW YORK — Aluminum scrap dealers are increasingly concerned about the possibility that Aleris International Inc. may enact sweeping changes to the scrap purchasing programs at its newly acquired company, Nichols Aluminum LLC.

Specifically, one scrap package exclusive to Nichols known as Davenport old sheet, or DOSA, could be particularly affected if Aleris chooses to reduce DOSA buying prices or eliminate the package entirely, scrap dealers said.

A spokesman for Cleveland-based Aleris, which agreed to buy Nichols for $110 million in February (, Feb. 10), would not elaborate on specific buying strategies or possible price reductions following the Nichols transition. “We will continue to buy the appropriate raw materials that we need to serve our customers,” the spokesman told AMM in an e-mail.

DOSA is loosely defined as bare or painted old sheet aluminum with an iron allowance of about 2 percent, with no mixed alloys such as 2000-series or 7000-series or stainless steel scrap, and a minimum amount of non-metallic material. However, one scrap dealer noted that “realistically the iron allowance in DOSA can be as high as 4 to 5 percent, based on demand.”

At least four industry insiders said that DOSA packages currently being purchased by Nichols are sometimes misrepresented by scrap sellers. “It’s my contention that these packages are no better than secondary packages, and if the dealers know what they are doing they certainly won’t tell you about it,” one industry source said.

Despite the allegations of misrepresentation, it is unlikely Aleris will discontinue purchases of the DOSA package, industry sources told AMM, and will instead opt to assess the accuracy of DOSA price quotes and material specifications once the transition phase is completed, likely at the end of March.

A source familiar with the matter told AMM that “everything that is presently being bought will most likely come under scrutiny once the transition is complete. Not all old sheet packages can be evaluated in the same manner, and baled scrap in particular always has an element of risk for the buyer.”

One scrap broker said that dealers are wary of the transition because Aleris scrap buyers are viewed as “more disciplined.”

The broker said he believed that Nichols’ analysis of aluminum scrap was less comprehensive than most secondary aluminum alloy producers. “I don’t believe they weigh the iron, the dirt and non-metallic material such as wood, rubber or plastic coming off of their shredder. The material is analyzed by visual inspection and then goes into a grouping of old sheet. The big question is, will Aleris change that production policy or continue in the same manner?”

Moreover, some contend that buyers at Aleris, who deal heavily in secondary markets, are more in tune with the intrinsic values of scrap. “Nichols’ buying practices have always been a little simpler: They hedge, they buy off of the terminal market, and end up overpaying,” a trader source said. “The ideal solution is to evaluate the competition first.”

The source added that as of March 25, Nichols was quoting approximately 77 cents per pound for DOSA packages. “The rest of the market is at 71 to 73 cents per pound for a typical old sheet package,” he said. “I can see Aleris bringing the price of the package down to market levels.”

The source noted that the difference between the DOSA package and a typical old sheet package is in the recovery. “Technically, you are supposed to be looking at 1 to 2 percent total contaminants for the DOSA package. For a typical package of old sheet, you would expect 4- to 7-percent deductions,” he said. “It is a better package, but it shouldn’t command the kind of premium that Nichols is putting on it. It should get about 1 to 2 cents more than the average old sheet package, not 5 cents.”

Davenport, Iowa-based Nichols produces aluminum sheet for the transportation, building and construction, machinery and equipment, consumer durables and electrical industries in North America. The Feb. 10 acquisition included two production facilities in Davenport, a facility in Decatur, Ala., and another in Lincolnshire, Ill.

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