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2014 Outlook: Secondary aluminum



ast year was tumultuous for the aluminum scrap market: Sweeping rule changes announced by the London Metal Exchange underscored ongoing issues with warehousing queues and high premiums for physical delivery; China implemented its now-infamous “Operation Green Fence,” forcing sellers to look for alternative international destinations for lower-grade scrap, such as nonferrous auto shred; and unprecedented demand from the automotive sector forced secondary alloy producers to scramble for material.

Most believe that issues related to LME warehousing will persist this year, while China’s heightened inspection of aluminum scrap imports will continue to present significant challenges for exporters.

The LME rule changes intended to reduce warehousing queues already have caused price fluctuations in the Midwest premium and the North American special aluminum alloy contract (Nasaac)—widely used in aluminum scrap pricing—and will cause long-term effects on pricing methodology for aluminum scrap, sources said. 

“We don’t believe the Midwest premium will cause undue price volatility for secondary aluminum prices, but it will certainly have an effect on values paid for the scrap,” one Midwest-based scrap seller said. “Primary/higher grades of secondary scrap will see prices decline if the Midwest premium moves lower as the relationship between the terminal markets and scrap markets do have a correlation.” 

The premium would need to shift to levels that would make primary aluminum attractive to melt for the mills, which would allow secondary consumers to lower scrap prices, he said. “In our opinion, the Nasaac price will continue to have more influence over secondary scrap prices than the Midwest premium.”

Several aluminum scrap sellers countered that the Nasaac issues had become relatively obsolete over the past six to 12 months. “Everyone recognized the problems with Nasaac and now they are fully factored in,” said Rob Carey, president and principal of Mansfield, Ohio-based Metal Conversions Ltd. “It’s almost a non-issue and will be a complete non-issue by the end of (2014).” He acknowledged that U.S. automakers want to keep the contract in play, but die casters will continue to fight against it.

China’s heightened inspection of imports of raw material, dubbed Operation Green Fence, was another major change in 2013. The initiative, which came on the heels of a leadership change in China, was implemented as part of broad-scale efforts to help alleviate widespread environmental problems in the country.

While early reports indicated that the initiative would wind down in early November, it now appears that officials plan to keep the policy in place through 2014.

“China’s implementation of ‘Green Fence’ has had the effect of creating a baseline for inspection and enforcement of import standards for scrap going forward,” said Robert Stein, president of the Bureau of International Recycling’s nonferrous division and senior vice president of nonferrous marketing at St. Louis-based Alter Trading Corp. “The impact will continue to be felt in the aluminum scrap market, especially in the form of zorba (a nonferrous auto shred), as heightened enforcement will seemingly continue, if not to the extent that it was evident in the second half of 2013.” 

Stein said this will likely have a negative but yet-to-be-determined impact on “shipments headed to China in 2014, as shippers still feel threatened by both the enforcement and the fact that there is often minimal notice given of changes in practice. We know what the rules are now, but changes that occur swiftly are alarming and in the long term are damaging in themselves, regardless of whether the quality of scrap can be improved or not.”

Others noted that most major scrap exporters have begun to understand the various nuances of the “Green Fence” initiative. “The major producers of zorba will continue to conform to Chinese standards. The people who will suffer are the mom-and-pop shops that are not able to make high-quality material,” Carey said. “Either they are making a 90-percent product and not fudging it or they are faking it all together.”

For domestic sellers, access to adequate supply streams will continue to be a challenge and margins will remain tight, market participants said. “My own guess—just a guess—is that volumes will remain close to current levels that we are now seeing coming into our facilities for the coming year, with an anticipated increase in line with the slowly expanding economy in the United States,” Stein said. “We believe that material will still be tight, will be highly valued in its relationship to the products it is being used for, and margins will continue to be compressed in a fashion similar to the past two years.”

Additionally, record production numbers in the automotive sector should continue to provide strong demand for scrap, sellers said. “The growth in the automotive sector should serve to raise demand for the scrap needed to produce cars,” the Midwest scrap seller said. “This should be good news for scrap companies as, based on the current situation, there is not enough secondary scrap to meet the current demand from consumers. Any further increase in auto production will put even more pressure on the current lack of supply, which should raise scrap prices.”

Carey said that his company, along with several other scrap sellers, was planning to ramp up production in 2014 to meet growing demand from the automotive industry. “The demand is there and our customers are asking for more product,” he said. “I think the 380 people are pretty well maxed out. Most people don’t think that auto production can go much higher. We have absolutely no issues getting scrap and I think that trend will continue through 2014.”

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