ISRI 2006 CONVENTION & EXPOSITION: Is Aluminum “Stronger for Longer?”

According to presenters at Spotlight on Aluminum session at the ISRI (Institute for Scrap Recycling Industries Inc.) 2006 Convention & Exposition, the secondary aluminum market will likely continue its upward pricing trend in the near future. However, there are some factors at play that could lead to price reductions.

Stephen Johnston, senior industry analyst at Alcan, headquartered in Montreal, Quebec, Canada, explained the factors that have lead to high aluminum prices and also provided information on what could lead to lower prices in the future. Johnston said that inventories in weeks of shipments have reached record lows; prices for spot aluminum purchases are at roughly $600 per ton, the highest they have been in almost 17 years; smelters are facing huge rate increases for power, which have caused some to close; there will be little smelter expansion in the West during the next few months; and the U.S. dollar has weakened considerably in the last three years, contributing to higher aluminum prices in the short term. Looking at the longer-term situation, he said that most of the recent smelter projects are high-operating-cost capacity that will likely close if prices drop; few locations remain worldwide that offer low-cost power for new smelter projects; smelter technology improvements that could drive down operating costs are moving more slowly than in the past; and costs of emissions from smelter and power plants under the Kyoto Accord are pushing up aluminum prices longer term.

Johnston also speculated on events that could lead to lower aluminum prices. He expects alumina prices to decline during the next few years because of refinery expansions. However, Johnston does not see alumina pricing falling below $200 per ton. Prices for coal, natural gas and oil are also likely to decline somewhat in the next few years, causing energy prices to moderate, according to Johnston. He also cites the possible decline in prices for competing materials; a possible decline in demand; and the possibility that the political situation in Russia could improve, leading to major power and smelter projects with Western capital as events that could lead to lower aluminum prices.

Robin Bhar of UBS Investment Bank said metals pricing will likely be “stronger for longer,” including those for aluminum. He said investors have come to appreciate the profit from commodity markets, seeing them as a good way to diversity a portfolio.

Bhar said UBS is forecasting a shortfall of 100,000 tons of aluminum for 2006, but that the company is projecting an oversupply situation of nearly 300,000 tons for 2007. However, he added that the impact of investor buying could

“Zinc and aluminum tend to do better in more advanced stages of the business cycle,” he said.

Metals prices have been affected by a number of factors, including high energy prices and moves toward urbanization in China and other emerging economies. Bhar sees additional drivers affecting the aluminum market in 2006, including the synchronized economic growth of Europe and Japan, government and central bank policies, geopolitics and a lack of capital investment.

Energy costs account for a third of the production costs for aluminum compared to 10 percent to 15 percent for copper and zinc, Bhar said. Escalating energy costs could lead to the closure of 750,000 tons of primary aluminum capacity in Europe, he added.

China currently produces more aluminum than it is capable of consuming. The Chinese aluminum industry may need to be more cautious in the next 12 to 24 months, Bhar said, adding that the country is trying to rein in expansion of aluminum smelters.

Bhar also noted some factors that could negatively affect aluminum pricing going forward, such as an Avian Flu outbreak, a slowdown in China’s urbanization, an emerging markets financial crisis, higher oil prices and the tightening of liquidity by central banks.

Gary Curtis of Wise Metals Group, Balimore, Md., addressed attendees of the session from his dual perspective as a consumer and a processor of aluminum. He quipped that his experience at Wise has been “a good training ground for a life in politics.”

Wise Metals Group LLC includes Wise Alloys, which Curtis said is the world's third-leading producer of aluminum can stock for the beverage and food industries; Wise Recycling, a collector and processor of aluminum cans; and Listerhill Total Maintenance Center, which provides maintenance, repairs and fabrication to manufacturing and industrial plants.

Curtis says he sees a number of opportunities in the secondary aluminum market for both consumers and processors. Among those he cited on the consumer side were wider spreads that help to offset other rising prices; availability of scrap; the increase in long-term contracts and quality improvements. The opportunities he noted for processors were increasing margins, more volume of material, new markets to sell into and freight synergies.

Curtis also outlined a number of challenges affecting processors and consumers of secondary aluminum. For processors, Curtis sees increased working capital costs, higher freight and energy costs and consolidation among consumers as challenges. The challenges facing consumers, according to Curtis, are increased working capital costs, increasing shipping and energy costs, consolidation among processors and the entrance of new buyers.

Curtis closed by saying that processors must understand what consumers of secondary aluminum are facing. “The elimination of consumers is not good for business in the long run,” he added.

The 2006 ISRI Convention & Exposition was April 2-6 at the Mandalay Bay Resort & Casino in Las Vegas.