Analysts question international, domestic markets' ability to absorb aluminum scrap glut

Analysts question international, domestic markets' ability to absorb aluminum scrap glut

Mike Southwood and Greg Wittbecker of CRU Group question the ongoing ability of these markets to consume U.S.-generated aluminum scrap.

December 14, 2018
DeAnne Toto

While other export markets have stepped in and U.S. consumers have increased their buying to keep aluminum scrap generated in the U.S. flowing, analysts from CRU Group question their ability to continue consuming the excess scrap that is available on the market.

Mike Southwood and Greg Wittbecker, both Pittsburgh-based aluminum industry analysts with CRU Group, spoke during a Dec. 12 webinar hosted by the Aluminum Recyclers Council (ARC), Wauconda, Illinois.

“When talking about the scrap supply glut in the U.S., obviously a lot of it has to do with China,” Southwood said, noting that the country had become the largest consumer of U.S.-generated twitch and zorba in the last decade. “The U.S. industry really built up around that to support it. Investments were made, shredders were added, and a lot of people and their companies relied on this trade of aluminum twitch and zorba over to China.”

However, he added that when China implemented its Green Fence initiative in 2013 to crack down on inferior quality imports, U.S. exports of aluminum scrap to that country declined 16 percent. As of late 2018, these exports have decreased 62 percent from their peak.

Southwood added that while shredded aluminum scrap imports to China increased in 2017, that growth was in response to China’s assertion that it would implement a scrap ban and uncertainty surrounding the scrap grades that would truly be affected. “There was a lot of uncertainty, and it created a lot of increased buying from China to get ahead of any potential scrap ban that might be coming down the pipeline,” he said.

In 2018, total aluminum scrap exports have increased despite declining imports from China, Southwood said. “At its height, China accounted for about 70 percent of total U.S. aluminum scrap exports in the years 2011 to 2013. [In 2018], annualized, we expect it will only account for about 34 percent of total aluminum scrap exports from the U.S.”

Southwood also attributed China’s reduced appetite for scrap in part to its increased self-sufficiency in this area.

According to CRU’s Beijing office’s analysis, China is prioritizing the support of secondary industries, as well, he said. “They estimate that secondary aluminum production will grow to about 15 million tons by 2025.”

China could still ban Category 6 material, which includes zorba, Southwood said, adding that the CMRA (China Nonferrous Metals Industry Association Recycling Metals Branch) wants to prevent this from happening. “Some colleagues of ours were at a conference over there, and the CMRA was discussing how they might avoid this, and they were looking at possibly changing the trade code—the HS code. They actually want to stop calling it scrap and refer to it as ‘recycled metal furnace feed,’” he added.

While these factors are affecting China’s aluminum scrap buying from the U.S., the biggest deterrent, Southwood said, was the 50 percent duty that China has placed on U.S. aluminum scrap imports in response to the Section 301 tariffs the U.S. placed on Chinese goods.

U.S. exporters have responded to the Chinese duties by shifting marketing efforts to other Asian markets. Southwood said U.S. exports of aluminum scrap to India and Malaysia, in particular, have increased by 176,000 tons in 2018. He said this has nearly covered the 204,000-ton gap created by the decline in trade with China.

“Obviously, if you are a domestic U.S. scrap generator, you are encouraged by the pace of exports that we have seen to these alternative markets,” Wittbecker said. However, he added, “The pace of increased exports to places like India, South Korea and Turkey is not sustainable based on the rates of growth in the CRU forecast that second alloy demand is going to grow in these markets.”

Wittbecker continued, “So, while in the short run it is encouraging to see export volumes of scrap going up to these other markets, which would cause you to draw the conclusion that the market has been able to replace China … our response to that would be that there has been a short-term response. Scrap prices got very cheap, people in those markets reacted to a bargain, and they are importing a lot more scrap. But the difficulty is that they can't consume scrap at that run rate for an extended period of time. The punchline here is that it's unrealistic to expect exports to these markets to continue at the same pace that we've seen so far this year because they simply don't have the demand in those markets to absorb that scrap.”

Within the U.S., Southwood said for much of 2018 the market could not absorb the overhang of aluminum scrap in the market. “From what we understand, that is still the case and they are actually booking into late Q1 2019, early Q3” for scrap. He added that this excess has contributed to softer prices and historically wider spreads.

“When you get into the automotive segment, that’s where you see some constraints in people being able to absorb this tremendous increase in automotive-related scrap,” Wittbecker said. “The difficulty that is involved with the automotive alloys is that some of these alloys are more or less scrap friendly, so to speak. In other words, different mills have higher or lower capabilities of absorbing these scraps when they come back from different OEMs (original equipment manufacturers).”

Wittbecker added that the varying chemistries of automotive aluminum scrap are challenging some mills’ abilities to effectively use this material.

Within the U.S., a number of aluminum scrap consumers are investing in added scrap processing capacity, he said, including Tri-Arrows Aluminum Inc., Spectro Alloys Corp., Matalco, Arconic, JW Aluminum, Alcoa and Braidy Industries.

“I think the key message here is that most of the investment that you are seeing right now in this market is from the mills that are looking to try to take advantage of this increase in automotive supply and not really all that much increase in capacity to take advantage of the increased zorba and twitch,” Wittbecker said, noting that the Spectro investment was the only one that targets this material.

“I think if you talk to people in the industry, they would say that we probably have enough installed capacity to use more scrap,” he continued. “The real question on the obsolete grades is do we have sufficient growth in secondary demand to really allow us to absorb additional scrap. It's the same issue that I mentioned about some of these external markets like India and Korea—a lot of supply available, but can they use it and turn it into alloys that they in turn can sell themselves.”

Wittbecker added, “In the long run, the people that are really going to do well in this type of environment are the people that invest in the ability to use more scrap and the extent to which they can wean themselves off of additional primary metal units.”