Aluminum producers need to come up with a better pricing system
as remelt suppliers of billet and other aluminum products face
a tight scrap market and tighter scrap spreads that eat into
profits, according to industry executives.
Unlike the steel
industry, almost the entire aluminum supply chain lacks an
appropriate mechanism to account for scrap cost trends that can
be published in a way that is transparent and that different
sectors of the extrusion chain can understand, Tom Horter,
president and chief executive officer of Bluffton, Ind.-based
Alexin LLC, said at AMMs Aluminum Summit in New
mechanisms) need to be tied to a trusted press source who can
independently go out into the marketplaceand this can
even be regionaland publish on a periodic basis what the
scrap discount numbers are doing relative to some index,"
Horter said. "The industry then needs to use this data
transparently ... to understand the pricing challenge and
adjust premiums on a regular basis" to account for scrap margin
pressures encountered by producers.
"I think the suppliers
of scrap-based aluminum products need to implement
price-adjustment or scrap-spread-adjustment mechanisms in their
contracts for 2014," he said.
Alexin has had
"limited success" in implementing such mechanisms in two of its
contracts this year but would like to see the practice spread
across the industryand not just in the interest of
suppliers, Horter said. "The last thing a downstream producer
wants ... is an unhealthy supply base," he said.
Returns in the billet
business in recent years have been unacceptable, Hydro Aluminum
Metals USA president Matt Aboud said in a question-and-answer
session at the conference, noting that pricing seems to be
based on primary producers coming out with a market premium and
remelt firms "tacking on" a scrap spread they think they can
achieve in the next year. But in a tight scrap market, remelt
companies are the marginal producers and should therefore be
the price setters and perhaps set their required conversion
premiums, essentially dictating a rise in the primary billet
OCarroll, senior vice president of research at Richmond,
Va.-based Davenport & Co. LLC, who moderated the panel,
said the aluminum industry has generally relied on "legacy ways
of doing business," including how it prices products. But
unlike in the past, more profits are now being made on
downstream products than on the upstream.
marginal producer should be setting the pricing mechanism," he
said. "So it would be that the remelters ... should be the
Prices would then be
based on a base plus a scrap surcharge mechanism,
OCarroll said. "Thats where were headed, some
form of scrap surcharge works. It works reasonably well in
steel, as well as anything works in steel." But there would
also have to be acceptable pricing for prime producers that
also make billet. "Some sort of mechanism ... is called for,"
A similar change was
needed for continuous cast producers on the flat-rolled side,
OCarroll said, but noted that both producers and
customers have to see and agree on the benefits of any new
But Horter said scrap
discounts that are hurting remelters are also helping primary
suppliers in the form of rising Midwest transaction premiums.
"So in essence the scrap discount that is hurting the remelters
is being realized by the primary suppliers in the form of a
broadening Midwest transaction premium," he said.
And Jeffrey Henderson,
marketing director at Sapa Extrusions North America, said the
problem is perhaps even more basic than coming up with a new
mechanism. "Many of the (original equipment manufacturers) that
we supply to ... have never even heard of a billet premium,
were not even sure what a billet was, saw it as an increase and
went back to their script on how to beat down an increase," he
Sapa then had to
explain to customers why the increase was necessary and how it
was essentially a pass-through. "The customers that are asking
for higher scrap content need to be communicated to about what
the cost of that is going to be," he said.