NEW YORK "Historically low spreads" and tight scrap flows weighed on Aleris International Inc.s second-quarter earnings as scrap dealers continued to hold inventory while waiting for higher prices, the company said during an earnings call Thursday.
Aleris chairman and chief executive officer Steven J. Demetriou said during the call that the performance of the companys global recycling sector had a negative impact on its balance sheet, with the Recycling and Specification Alloys North America segment recording a 38.4-percent year-on-year drop in segment income to $14.6 million during the quarter from $23.7 million a year earlier.
Segment income has been affected by lower spreads, caused by "a lower selling price to customers while scrap costs remain high," he said, adding that those higher costs are a result of tight scrap flows caused by a downturn in London Metal Exchange prices.
"We believe scrap dealers are refusing to part with inventory with such depressed LME prices," Demetriou said.
The situation will improve with a recovery in LME aluminum prices, he said, but added that Aleris "expects spreads to be tight in the third quarter" with LME prices still in a lulla trend that is also expected to negatively impact the companys third-quarter net income.
Demetrious remarks reflect the sentiment of scrap buyers contacted by AMM, who have said that buying activity has been sluggish, with sellers reportedly preferring to hold on to inventory until LME prices improve (amm.com, July 24).
The aluminum cash price closed the LMEs official session at $1,821 per tonne (82.6 cents per pound) Thursday. The price has steadily declined since closing at $2,308 per tonne ($1.05 per pound) on Feb. 28.
Demetriou also confirmed that the company has implemented a 5-cent-per-pound surcharge on rolled products in an attempt to offset tightening spreads on scrap, following similar moves by Jupiter Aluminum Corp. and JW Aluminum Co. (amm.com, July 2).
"Three additional scrap processing projects will come online in the third quarter," he said.
A company spokeswoman provided no further details.