Oct 09, 2012 | 07:13 PM

Nix on Nasaac: the anatomy of a failed contract

Tags  Nasaac, North American Special Alloy Contract, LME,

The secondary aluminum industry is a low-growth, low-margin, low-tech, traditional industry. And it’s struggling.

Since the 1970’s, the number of companies comprising the sector has plunged from just above 80 to slightly more than 20 despite about a 50-percent increase in alloy demand over that same period. During the same timeframe, we have seen six new secondaries start up and all six go bankrupt.

Part of this carnage is attributable to a tripling in “greenfield” costs due to tightening EPA standards, but probably the majority of the failures were due to entrepreneurs starting capacity where none was needed. A case can also be made that the North American Special Alloy Contract (Nasaac), instituted by the London Metal Exchange (LME) in 2002, played a destabilizing role.

One of the possible factors behind the birth of Nasaac was the failure of the LME’s “Aluminum Alloy” contract, which was more global, to gain traction. The “Aluminum Alloy” contract, first traded in 1992 was designed to commoditize the 380 family of automotive alloys for the European, Chinese and Japanese automotive industry, which now account for about 75 percent of current global production.

The 380 family of casting alloys, which includes the European version DIN 226, the Asian variation ADC 12, and North American 380.1, typically account for 200 pounds of the 300 pounds of casting alloy in a global car. Given global auto production of 80 million units, this pegs annual production at 8 million tonnes or about 10 percent of total global aluminum production. ....