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
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
LMEs North American special aluminum alloy contract
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 didnt drop as rapidly or substantially, with old
cast falling an average of just 8 cents per pound during the
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 wont 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 wouldnt
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
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 wont 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
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
Few players, however, were bold
enough to offer a prediction for where prices might head in
We expect scrap to not hit
the highs of (2012), but still stay fairly strong, the
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.
Edmunds.com 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 industrys ability to improve margins
rests almost entirely on auto sales. Everything
continuing as normal, well 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,
dont 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. Thats 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
Ive seen us full and
making no money, and then at 70 percent (of operational
capacity) and with the best margins weve ever had.
Margins are a complex game, the first producer source