NEW YORK 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 York.
"These (pricing 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 premium.
Analyst Lloyd 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.
"Theoretically the marginal producer should be setting the pricing mechanism," he said. "So it would be that the remelters ... should be the drivers."
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," he added.
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 mechanism.
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 said.
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.