Out of balance

Features - Aluminum Commodity Focus

Aluminum scrap markets continue to feel the effects of an imbalance between supply and demand.

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September 6, 2019

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An imbalance between supply and demand has characterized the domestic aluminum scrap sector for more than a year, compressing margins for scrap dealers. Additionally, global trade lanes out of the U.S. have shifted in response to China’s scrap import restrictions and that country’s trade war with the U.S. that seems to have no end in sight.

Despite the oversupply of aluminum scrap in the North American market, some scrap traders are trying to keep the situation in perspective.

“We’ve been here before,” a scrap processor and trader based in the West North Central region says. “It will come back up.”

A scrap processor and trader based in the East North Central region says, “Mill spreads have been softer, no doubt, but we were able to pass along some of those price changes to our customers, too. I personally think we are at or near the bottom, however, as collections of some scraps have slowed considerably, making it more difficult for mills to get scrap when they do need it.”

Less retail traffic

The source based in the West North Central region says the flow of obsolete scrap into his company’s yards is down slightly for the year through mid-August, in part because of price. “Dealers and even large peddlers are not willing to sell at that level,” he says.

“Material coming out of the industrial sector, which is the bulk of our business, has been consistent year over year,” the processor based in East North Central region says. “In some areas, particularly auto, we are seeing increases.”

He continues, “There are some warning signs, however, we see in the extruded market and in the 5052 markets we support. Those volumes are starting to slip just a bit. The peddler market has also been slightly down, but we aren’t yet able to tell if that was price or weather-driven in the first half of the year.”

“Peddler business has been off due to low ferrous pricing, but industrial scrap seems to be strong,” a second processor and trader based in the East North Central region says.

Areas along the West Coast have not seen a similar downturn in retail traffic, however. A processor and trader based in this region says peddlers and dealers in Southern and Northern California are less likely to hold onto material because of the cost of land and space limitations in these areas.

Generation has remained steady, a broker based in the Midwest says, “but it feels like there is more out there because demand is so weak.”

Soft domestic demand

A number of sources contacted for this article say domestic demand for aluminum scrap is “very weak” or “terrible.”

“Demand for almost all grades of scrap has been softer this summer than any other time I can remember,” the first source based in the East North Central region says. “There are a few bargain hunters, but for the most part, mills aren’t quoting.”

The source in the West North Central region says, “Demand from primaries has been relatively stable all year,” though he adds that it “has not been great by any stretch.”

He says his company has adjusted its sales strategy to correspond with how these primary mills are buying, adding that it sold material in June to ship in August. “It’s a different sales cycle than it used to be.”

The West North Central region source adds that demand from secondary mills “has really fallen recently.”

Most sources mention an overall lack of domestic spot market orders, with the broker saying, “Getting consumers to quote on a spot basis and/or take deliveries” is the biggest issue facing the aluminum sector as of mid-August.

“Offer fair numbers that support collections [and] take delivery when you agree to, and processors will take care of the rest.” – a processor and trader based in the East North Central region

“We saw a lot of demand early in the year for all types of RSI (remelt scrap ingot),” the first source in the East North Central region says, specifying the 3X, 6X and 5X grades. He says used beverage containers (UBCs) also were in demand at the start of the year. This demand “was largely due to where the contracts were being done and mills viewing those numbers as favorable to them.”

The first East North Central region source continues, “As the year has progressed, mills are less active largely due to weaker demand from their consumers (particularly auto) or due to the mills having too much scrap.”

The second East North Central region source says, “On the primary front, spreads are extremely wide. On the secondary front, the enormous amount of zorba and auto scrap is flooding the market and pushing pricing down.”

The abundance of automotive scrap is displacing other aluminum grades, the source on the West Coast says. “Automotive throws everything off. It offsets the natural flow of things.”

Segregated automotive scrap is “still quite easy to sell,” he says, adding that segregation can be difficult to achieve at the plant level.

Regarding mixed automotive scrap, the West Coast source adds, “The mills that are more nimble and that have plant managers and procurement teams that are creative and willing to blend these mixed alloys have been consuming a great amount, even domestically.”

More competitive export demand

The soft domestic market has made some export markets more competitive on certain grades of aluminum scrap.

The Midwest-based broker says he has received more export inquiries for a range of aluminum scrap grades, adding, “and they actually can be competitive for items they normally are not since the U.S. demand is so weak.”

The second source based in the East North Central region says, “India has come pretty hard [into the U.S. market] and has given domestic processors another option.”

While the source in the West North Central region says his company traditionally does not export much aluminum scrap, it has been doing so in 2019. “We’ve been able to keep material moving and keep prices as high as possible because of our global network,” he says. “We can find a sale that is a little better than here going export.”

The first source based in the East North Central region says his overseas buyers are not “pushing on volume,” adding, “There are a lot of bargain hunters in the markets, too.”

The West Coast-based processor says trade lanes out of the U.S. for aluminum scrap are “quite unusual.” While his company primarily shipped secondary aluminum grades overseas, he says more prime grades are leaving for Asian and European destinations.

“In North America, most of the metal flowing around is on contracted sales,” the West Coast source says. “Europe and Asia [are] still quite transactional.”

His company engages heavily in export sales, having discovered a number of new homes for its aluminum scrap since China introduced scrap import restrictions and has been engaged in an ongoing trade war with the U.S., the West Coast source says. “Being increasingly creative and entertaining new destination countries as consumers has been very useful in being able to continue to move units.”

“We have been able to keep material moving and sell it at the best price available. That’s all you can ask for sometimes.” – a processor and trader in the West North Central region

Typical ups and downs

The first processor and trader based in the East North Central region says scrap processors understand that prices go up and down. “For the most part, we are a margin business and we can work with our suppliers on value. If mills are reasonable, they will get quality scrap at a fair price.

“But the thing to remember is that scrap processing companies are not financial lending institutions. If we have contracts, we need to be able to ship. Not giving the processors the ability to ship could have long-term effects on that company’s viability … How could that be good long term for any mill?” he asks.

“That ties into my second point, which is that the more and more prices go down, the more and more processors and the suppliers (peddlers or industrial accounts) that get them scrap will either a.) look for other sources to buy their material (export or otherwise) or b.) not recycle (more so in the peddler sector),” the first East North Central region source says.

His advice to mills: “Offer fair numbers that support collections [and] take delivery when you agree to, and processors will take care of the rest. The financial pie that is recycling is plenty big enough for everyone to get their fair share.”

The processor and trader based in the West North Central region says the aluminum scrap sector as of late summer is no different than it has been throughout 2019. “You can do two things: Complain that it’s harder or acknowledge that this is the job. It’s not easy; it’s more difficult to sell aluminum than it has been in some time.”

While prices are low and demand is weak for certain aluminum scrap grades, “There are things we can do to survive that,” he says.

“We have been able to keep material moving and sell it at the best price available. That’s all you can ask for sometimes.”

The author is editor of Recycling Today and can be contacted via email at dtoto@gie.net.