CHICAGO Aluminum prices on the London Metal Exchange might not improve for a year or more, but that wont change Novelis Inc.s plans for growth, president and chief executive officer Philip Martens said.
In fact, the trend of weak aluminum prices only serves as a catalyst for the Atlanta-based company to push toward using more recycled material, Martens told AMM in an interview.
Aluminum prices on the LME have mostly fluctuated between about $1,850 per tonne and $1,900 per tonne during the past year, Martens said, and "I dont see any market dynamics that are going to change that over the next 12 months or so."
"Nobody has a crystal ball. ... But weve adjusted our business to that (price level), and thats one of the reasons weve accelerated recycling," Martens said.
The LMEs cash aluminum contract sank to $1,800.50 per tonne May 15, down 1.4 percent from $1,825.50 per tonne on May 14 and down 15.2 percent from this years high of $2,123 recorded on Feb. 15.
But as prices have fluctuated, Novelis has simultaneously worked to boost the recycled content of its products to 43 percent in fiscal 2013 and has seen a "significant benefit" as a result, Martens said. The company was running at 45-percent recycled content at the end of its fiscal year ended March 31 and expects to hit 47 percent in fiscal 2014, moving "into the 50s" in the year after that, he said.
"We certainly have built a natural hedge as we increase recycling against whatever the LME does," Martens said, conceding that the benefit Novelis sees from using recycled aluminum instead of prime material drops with the LME. But while the spread between prime and recycled material might shrink in absolute terms, "there is a general law of the jungle out there that you buy whatever is cheaper, and scrap is always some percentage less than (the) LME," he said.
A depressed LME price wasnt the only challenge Novelis grappled with in its fiscal year, Martens said. The installation of a new enterprise resource planning system (ERP) disrupted its North American operations, costing the company about $39 million its fiscal third quarter (amm.com, Feb. 12).
The new system was not "stabilized" until about the end of February but is now "running quite well," providing greater transparency in terms of inventory management, order flow and scheduling, Martens said. The new system, which Martens said took about 50 percent longer than Novelis had anticipated to install, is necessary as Novelis looks to penetrate the automotive business this summer from its aluminum complex in Oswego, N.Y., he said.
Novelis expects to commission two finishing lines for automotive aluminum in Oswego this summer (amm.com, May 14).
"I think the benefits will really come when we get that (automotive) business launched," Martens said.
The new SAP software system replaces a previous "batch and hold" system that required more manual intervention, Martens said. "Its like taking your 1990 home desktop computer and comparing it today to the smartphone. Thats how big the difference was from the old to the new," he said.
The other big challenge Novelis faced this past fiscal year came from a rapid rise in local premiums in Asia, Martens said. Regional premiums in Asia jumped to about $220 per tonne in September from approximately $60 to $80 per tonne in June and July, something that "nobody anticipated," he said.
The issue proved to be a "real challenge" to Novelis in its third and fourth fiscal quarters, Martens said. "If the LME (price) and the (Shanghai Futures Exchange price) are about the same and regional premiums dont exist, everything is good," he said.
But problems arise when the LMEwhich typically trades below the Shanghai Futures Exchangeplus the regional premiums is greater than the exchange price, Martens said. "Then, quite simply, the rollers in China have an economic benefit. ... They can be very price-competitive," he said.
Meanwhile, Martens declined to speculate on the potential impact of high warehouse stocks and new smelting capacity coming online, citing the difficulty of forecasting their impact on the market with much certainty.