Backward integration

Steel Dynamics Inc.’s (SDI’s) decision to enter the aluminum rolling sector was in and of itself blockbuster news. However, the repercussions on the aluminum scrap market could be even more profound.

CRU International has theorized that the big aluminum rolling mills eventually would borrow from the SDI and Nucor business models and backwardly integrate into the scrap market to gain better control over their feedstock. Fort Wayne, Indiana- based SDI now will demonstrate how that will be applied.

SDI’s purchase of OmniSource in 2007, and Charlotte, North Carolina- based Nucor’s purchase of The David J. Joseph Co. (DJJ) in 2008 were considered bold moves. SDI paid $1 billion for OmniSource, which also is based in Fort Wayne, and Nucor spent $1.44 billion to acquire DJJ, which is based in Cincinnati. Both companies wanted ferrous supply surety primarily. They also got valuable non- ferrous franchises in the process. Both decisions have paid off handsomely.

SDI notes that OmniSource secured 42 percent of its ferrous supply during fiscal year 2021. In its 2021 annual report, Nucor reports that DJJ had 5.4 million tons of processing capacity, while 91 percent of its brokerage volume was consumed internally.

Aluminum’s uneven commitment

The aluminum rolling industry historically has had an uneven commitment to backward physical integration.

Years ago, Alcoa and Reynolds operated large, retail recycling centers for purchasing used aluminum beverage cans (UBCs). They were beautiful facilities, but high-cost, and never realized their potential of delivering high-volume, low-cost metal units. Alcoa shut its system down in the 1990s, and Reynolds sold its last 29 centers to Wise Metals in 1999.

Anheuser Busch, Coca-Cola and Coors all took turns building and then dismantling UBC recycling organizations. They were successful in their time, but each company eventually decided that recycling was not a core business, and they exited the market.

Alcoa and Novelis set a goal to source UBCs through their formation in 2009 of Evermore Recycling Co., Nashville, Tennessee. While Evermore did not operate scrap yards, it aggregated large volumes of UBCs and optimized logistical efficiencies. Although initially successful in execution, Novelis chose to terminate the joint venture in 2011. Alcoa took sole control of the company before eventually folding Evermore personnel back into its internal procurement organization.

Today, the only semblance of backward physical integration in the aluminum rolling market is the closed-loop tolling arrangements that exist for aluminum beverage can scrap (“class” scrap) and automotive stampings.

Can scrap represents about 16 percent of the volume of can sheet shipped from the mills. Virtually all the class scrap generated within North America finds its way directly back to the domestic mills. These mills also are purchasing class scrap being generated by North American can makers derived from imported can sheet.

Automotive scrap represents 45 percent to 50 percent of the volume of auto body sheet (ABS) shipped. Approximately 50 percent of the ABS scrap is routed back to the originating ABS mill through a closed loop. The balance is being captured, processed and sold by independent scrap dealers, including OmniSource and DJJ.

Now that SDI intends to adapt its integrated ferrous model to aluminum, it could force change in scrap flows and accessibility.

A new role

OmniSource is the largest U.S. nonferrous scrap processor and operates substantial auto shredding capacity, with some 60 locations stretching from Indiana to Mexico. Regional trading offices complement the yards and give them impressive brokerage/trading capabilities. These assets now will be leveraged to complement the aluminum rolling mill, just as they complement SDI’s steel mills.

OmniSource trades the full gamut of aluminum scrap, from obsolete, secondary grades to new production mill grades. OmniSource’ s large auto shredding footprint makes it a producer of zorba and twitch, the principal feedstock of the aluminum secondary diecasting sector. It also trades substantial volumes of original equipment manufacturer (OEM) new production scrap, sourced from turnkey arrangements with OEMs.

The company’s coverage of the market is undisputed, and, in the past, its prowess in sourcing scrap enabled OmniSource to own the exclusive franchise to supply aluminum scrap into the old Nichols Aluminum mill in Davenport, Iowa. It has prominent commercial supply positions with many of the leading mills today. Those relationships could change with SDI entering the fray as a competitor to OmniSource’s customer base.

It is likely that OmniSource’s supply of mill-grade scrap to third-party rolling mills will be redirected internally once the SDI mill comes on-stream.

Altering scrap markets

It is not a coincidence that SDI’s news release about the new aluminum mill alluded to plans for a major secondary aluminum slab casting facility in Mexico. In May, SDI acquired the major Mexican recycler Roca Acero, with scrap processing capacity of more than 850,000 tons (ferrous and nonferrous). In 2020, SDI acquired another major Mexican ferrous company, Zimmer S.A.

These acquisitions complement SDI’s new 3-million-ton-per-year steel rolling mill in Sinton, Texas. Roca and Zimmer could be positioning themselves to capture the large amount of UBCs and class scrap in Mexico.

SDI has indicated it plans to position a second secondary aluminum casting facility in the U.S. Southwest. Perhaps it would be in Arizona, where it would be well- situated to capture California and Oregon deposit UBCs, plus nondeposit UBCs from west of the Rockies.

Scrap deficit to swell

The aluminum industry went nearly 40 years without a major greenfield mill (Logan County, Kentucky, being the last in the early 1980s.). Now, three new mills have been announced in two months:

• Novelis’ mill in Bay Minette, Alabama, with 600,000 metric tons of capacity starting in mid-2025;
• SDI’s Southeast U.S. location to be determined, with 650,00 metric tons of capacity that will begin operations in the first quarter of 2025; and
• Manna Capital-Ball Corp.’s mill in Los Luna, New Mexico, with 600,000 metric tons of capacity that will start production in 2026.

Each of these mills will emphasis using high scrap content, with Manna Capital-Ball touting 85 percent. Novelis and SDI will not be far behind.

These mills will require about 2.5 million tons of rolling slab to push their combined 1.85 million tons of finished product out the door. That will require substantial third-party purchased scrap, in addition to the runaround scrap.

If we focus on the UBC requirements alone, the challenge will be daunting. Predicated on the announced product mix of the players, the three mills are expected to produce about 1.2 million tons of can body sheet. That could translate into as much as 550,000 metric tons of UBCs or Class 3 (decorated, processed can) scrap or even new painted siding.

Sponsored Content

SENNEBOGEN 340G telehandler improves the view in Macon County, NC

An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

Sponsored Content

SENNEBOGEN 340G telehandler improves the view in Macon County, NC

An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

Sponsored Content

SENNEBOGEN 340G telehandler improves the view in Macon County, NC

An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

Sponsored Content

SENNEBOGEN 340G telehandler improves the view in Macon County, NC

An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

Sponsored Content

SENNEBOGEN 340G telehandler improves the view in Macon County, NC

An elevated cab is one of several features improving operational efficiency at the Macon County Solid Waste Management agency in North Carolina. When it comes to waste management, efficiency, safety and reliability are priorities driving decisions from day one, according to staff members of the Macon County Solid Waste Management Department in western North Carolina. The agency operates a recycling plant in a facility originally designed to bale incoming materials. More recently, the building has undergone significant transformations centered around one machine: a SENNEBOGEN telehandler (telescopic handler).

Statistics from the Arlington, Virginia- based Aluminum Association for 2021 tell us that the U.S. domestic market consumed 725,000 metric tons of UBCs. So, the implied new demand from these three mills would represent about 75 percent of existing consumption. That is a “big ask.”

UBC recovery tactics

The Novelis and Manna Capital-Ball investments were a call to action for the supply chain to address UBC recycling rates. SDI makes it imperative. We do not have enough supply to meet implied demand.

Without a structural change in the recycling rate for UBCs, we are going to witness UBC discounts to primary aluminum narrow. The new mills will have to carve out supply against the incumbent mills.

While beverage companies have opposed deposit schemes as being anti- consumer, these laws are effective in boosting UBC recovery and in delivering high-quality product.

Extended producer responsibility (EPR) bills, where brand owners pay to recover their postconsumer material, have been proposed as an alternative to deposits. Beverage companies have been lukewarm on EPR, saying it is not much more effective in collecting incremental volumes nor is it cost-efficient.

A hybrid deposit-EPR scheme, details of which are being developed, have been proposed by some factions.

The entire supply chain must align on a common approach quickly. All the stakeholders need to recognize that raising the UBC recovery rate will generate a large enough profit pool that there will be sufficient gainsharing for all parties.

Greg Wittbecker is a 37-year veteran of the aluminum market. He serves as an advisor to London-based CRU International and an independent consultant on commercial/price risk management. Visit www.crugroup.com for more information.