FORT LAUDERDALE, Fla.
The United States is structurally short of aluminum
scrap and may never see metal margins return to peaks last seen
in 2005-2006, according to industry executives.
The scrap squeeze
comes as manufacturers increase recycled content, processors
become more adept at separating material to meet Chinas
"Green Fence" requirements and scrap inflows have stalled with
low London Metal Exchange prices, executives said.
In addition, an
expansion in U.S. manufacturing activity has worsened the
shortage because production now consumes more scrap than it
generates, they said.
"On the mill side,
since 2011 there has been a significant drop in the spreads
relative to P1020," Ted Lehmann, vice president of metal
procurement for the Americas at Cleveland-based Aleris
International Inc., said Jan. 14 at the Platts Aluminum
Symposium in Fort Lauderdale, Fla. "Its structural.
Its here to stay. Its going to be here for years.
We are not going back to 2005-2006 (spread) levels."
Spreads will likely
widen if LME prices go up but probably wont return to
levels seen in the mid-2000s, Lehmann said, adding that the
slowdown in exports resulting from Green Fence is likely to
Another reason that
previous wide spreads are unlikely to return is that the
2006-2008 commodities "super-cycle" and high LME prices brought
a decades worth of scrap out of garages and basements
that was turned into cash. "You can only do that once. And then
it has to build for another decade or two," he said.
In addition, cars
today last longer and take more time to enter the scrap stream
while more companies are looking to "close loop" their own
scrap, Lehmann said.
Kevin Ferguson, vice
president of procurement at Bluffton, Ind.-based Alexin LLC,
blamed the tight scrap situation in part on limited
availability of prime P1020 remelt ingot, increased competition
from corporations looking to be more "green"including the
automotive sectorand some scrap dealers hoarding material
as they bet that LME prices have bottomed and wait for them to
Ferguson recalled a
scrap supplier approaching Alexin with material but refusing to
part with it. "Im not ready yet. I want to see the LME
get back over $2,000 (per tonne) before I sell it," he recalled
the supplier as saying. "They feel that this market has hit a
true low point, and theyre waiting for it to come
outand they dont have to sell it because they
But Ferguson and other
speakers also questioned how widespread that phenomenon might
be given the risks associated with sitting on inventory,
including it getting dirty, stolen and losing value.
Walt Drosdick, senior
aluminum trader with Giampaolo Group of Cos., Brampton,
Ontario, maintained that the tightness is largely a result of
the unintended consequences brought by manufacturers to boost
recycled content in manufactured products.
Because of the push to
use scrap instead of prime, "the U.S. economy now has a
structural predisposition to tightness in scrap supplies, and
this condition has become a new driver between tight scrap
spreads and a new source of scrap volatility," he said.
manufacturers helped to create their own supply because scrap
generation increased with increased production, Drosdick said.
But in the following years, in 2012 for example, manufacturing
activitybecause of increased scrap usagehas instead
reduced scrap supplies, he said.
"The result is that
the manufacturing sector has become a formidable drag on scrap
supplies," Drosdick said. And there is no easy solution to the
"scrap gap" besides an increasing inflow of obsolete scrap,
decreased exports or increased use of primary metal, he
"High recycling content in manufactured products cannot be
sustained if total scrap flows out of the pipeline more than
inbound flows," he said.