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Secondary aluminum: No longer a simple supply-demand game

Keywords: Tags  secondary aluminum, 2013 outlook, aluminum alloy, LME, London Metal Exchange, aluminum scrap, scrap prices, Daniel Fitzgerald

Looking back at 2012, the year might be remembered as a period when conventional wisdom took a beating and the U.S. secondary aluminum industry largely lost--or, some would argue, relinquished--control of its own pricing.

While alloy demand reportedly was steady throughout the year, macroeconomic factors--particularly the ongoing debt crisis in Europe and its accompanying effect on London Metal Exchange pricing--seemed to weigh more heavily on free-market alloy and scrap prices.

Needless to say, the experience has reminded even the most seasoned of industry veterans that the metals business is no longer a simple game of supply and demand. This past year “violated every common law of economics. We had a million more cars produced, but margins went down,” a source at one alloy producer said.

“The margins have been a little disappointing based on the volume of business that everyone is doing,” a second producer source said.

Alloy producers expressed unanimous frustration at the “solid demand/low margins” trend seen throughout 2012, and have been almost as united in their identification of the culprit: the LME’s North American special aluminum alloy contract (Nasaac).

“Nasaac is the No. 1 reason for depressed numbers, and the fact that the industry responded late to it,” the first producer source said. He decried the tendency of many in the industry to regard the Nasaac price as an appropriate barometer or basis for A380.1 prices, a trend that became a problem when Nasaac tags started sliding at the end of March.

The Nasaac cash price began a gradual but persistent slide after closing at $2,180 per tonne (98.9 cents per pound) March 26. By Aug. 20 it had reached $1,782 per tonne (80.8 cents per pound), its lowest close since June 7, 2010, when it reached $1,780 per tonne, although it has since regained some ground.

Free-market A380.1 prices declined in step with the LME contract to a range of 97 to 98 cents per pound through most of August from $1.11 to $1.12 at the beginning of March. Crucially, however, secondary scrap prices didn’t drop as rapidly or substantially, with old cast falling an average of just 8 cents per pound during the same period.

“Most of us lost money in August, which is a heavy shipping month,” the first producer source said.

However, alloy producers are hopeful that the LME contract won’t exert quite as much influence in 2013 as it did in 2012. Aleris International Inc., Beachwood, Ohio, exemplified the growing dissatisfaction with Nasaac by publicly declaring in October that it wouldn’t be using the contract as a basis for its 2013 pricing, describing it as “highly disconnected from the underlying cost of our raw materials.”

In an encouraging sign for alloy producers, some die casters have expressed relief at Aleris’ move and reported dissatisfaction with Nasaac, indicating that there might be a greater amenability on the consumer side to prices that better reflect production costs.

One trader believes that ongoing difficulties in securing Nasaac material from LME warehouses in the United States might prove beneficial to alloy producers this year. “As long as the lines are still out to February 2014 you won’t find the material, and premiums will keep going higher and higher,” he said. “That means Nasaac will begin to put less pressure on the smelters and should give them the ability to make some margin back.”

However, lengthening queues at LME warehouses also could create margin pressure on another front: via higher scrap purchasing costs.

A third alloy producer source described scrap availability for 2012 as “very weak” because of this trend. “It was more competitive. The primary producers played a bigger part in scrap purchasing,” he said. “I think it will stay the same until we start seeing the warehouse metal. The premiums need to come down and the warehouse metal needs to become more available.”

One scrap buyer noted that the virtue of relatively high scrap prices in 2012 was that they managed to keep a lot of the metal from entering the export market, particularly on key grades like old sheet and old cast.

Few players, however, were bold enough to offer a prediction for where prices might head in 2013.

“We expect scrap to not hit the highs of (2012), but still stay fairly strong,” the buyer said.

The other side of the equationÑdemandÑseems to present a far more rosy picture. J.D. Power & Associates Inc., Thousand Oaks, Calif., and Oxford, England-based LMC Automotive Ltd. have charted a 12.5-percent rise in domestic light vehicle sales throughout 2012. And while the trend is expected to slow in 2013, further growth is anticipated. Inc. has forecast light vehicle sales of 15 million in 2013, a marked improvement from just 10.4 million in 2009, bringing the industry within touching distance of pre-recession levels.

With the vast majority of secondary aluminum alloys ending up in the automotive sector and the overall aluminum content of new vehicles expected to average an additional 200 pounds by 2025, according to Ducker Worldwide LLC, Troy, Mich., the increase has a direct bearing on the secondary aluminum industry.

“I think the volume will improve, driven by the automotive sector. Maybe if we get some help from housing it could be a very good year,” the second producer source said. “But this is not an industry known for its price discipline.”

A fourth alloy producer source agreed that the industry’s ability to improve margins rests almost entirely on auto sales. “Everything continuing as normal, we’ll be looking at 5- to 10-percent higher demand in 2013. But there are so many other factors right now beyond straight demand which affect the market. Normally I would just say increased demand will yield higher prices,” he said.

“I think the price of A380.1 will continue to rise through 2013 as long as demand remains strong,” the trader said.

Higher alloy prices, of course, don’t guarantee that producers will be able to make a profit, particularly if scrap costs rise along with them. “The spread between old cast and A380.1 needs to be at least 30 cents (per pound) to make a margin. That’s where we would like to be,” the first producer source said.

In addition to scrap purchasing costs, producers also face pressure from rising freight and operational costs, the third producer source said. “Insurance, transportation, gas; it all seems to be going up.”

“I’ve seen us full and making no money, and then at 70 percent (of operational capacity) and with the best margins we’ve ever had. Margins are a complex game,” the first producer source said.

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