BIR CONVENTION: Well-Funded Demand

Market fundamentals are strong in the aluminum sector, but industry analyst Jim Southwood of Commodity Metals Management Co. also sees a danger of over-investing by fund managers that could be leading to “price exaggeration” that is not sustainable.

Speaking at the Nonferrous Metals Division meeting at the Spring 2006 Bureau of International Recycling (BIR) Convention, Southwood described a “vicious cycle” of price exaggeration that “will all end in tears.” He noted that fund managers may have invested as much as $60 billion in aluminum—a figure that is worth “150 percent of all the alumimum produced every year,” according to Southwood.

Despite this concern, Southwood characterized aluminum as enjoying strong fundamentals in the midst of its longest “bull market” since the 1987-1991 cycle,  and “this bull market is set to exceed that one.”

Demand for aluminum is “outstanding” following a period earlier this decade when a great deal of smelting capacity in the United States and Europe was shut down. The result is likely to be a 300,00-metric tons supply deficit for aluminum in 2006, Southwood predicted.

Aluminum scrap dealers will benefit from active purchasing from Chinese buyers for several more years, said Southwood, who is forecasting that the nation’s secondary aluminum producers will not be able to close its scrap loop until 2013 at the soonest, and perhaps not until 2025.

Southwood claimed that a long-term scrap shortage trend has been masked by the flood of materials from the former Soviet Union in the previous decade and by a series of natural disasters this decade (the tsunami and the Gulf of Mexico hurricanes) that have created “mountains of scrap that we’re all living off of.”

As those piles are cleaned up, only now will higher prices for aluminum scrap be needed to draw out more material.

Michael Oppenheimer of U.K.-based Mountstar Metal Corp. presented market reports from throughout the world, with a common theme being that red metals producers were paying record high prices for their scrap.

Oppenheimer reported that East Asian brass mills are regretting buying on a just-in-time spot basis, as prices for both copper and zinc scrap continue to rise.

European dealers report strong demand coupled with tight supply in some countries. In Germany, “scrap is available, but only at high prices, leading to financing problems,” Oppenheimer reported.

On behalf of North America, Oppenheimer remarked that both volumes and margins are good for dealers there, although they must work furiously to get their scrap “quickly into the market” rather than being caught with high-priced inventory.

BIR Non-Ferrous Division Marc Natan of France’s GDE Non-Ferreux – ECORE put in a good word for hedging as a way for nonferrous dealers to help protect themselves in the volatile market. Although hedging may mean making a smaller profit on some transactions, the practice can produce a satisfactory margin while insuring against a major loss, Natan noted.

The BIR Spring 2006 Convention was held at the China World Hotel in Beijing May 29-31.