2016 ISRI Convention: Trading places

Price volatility in 2015 may have helped set the stage for new aluminum trading contracts, according to presenters at a session at the 2016 Institute of Scrap Recycling Industries Inc. (ISRI) Annual Convention, which took place in Las Vegas in early April.

Reviewing the state of aluminum in 2015 and early 2016, ISRI Director of Commodities Joe Pickard noted that its London Metal Exchange (LME) pricing was down in March 2016 but is up 1.4 percent year-to-date. The price “changes day-to-day,” said Pickard, which is one reason new trading contracts for the light metal are being introduced.

Another reason to consider hedging aluminum scrap trades against a contract, said Pickard, might be forecasts that are calling for the metal to fall in value from its 96 cents per pound level in March 2016 to the 61-to-70-cents-per-pound level later in the year.

Panelist Fred Penha of the CME Group, Chicago, said the firm has been “building out” its group of aluminum contracts so scrap recyclers can work with fixed pricing on both the buy and sell sides.

He said CME’s new Aluminum Midwest (AUP) contract has been gaining adherents and said CME’s metals division was involved in “100,000 metric tons of hedging just last week.”

Penha touted the CME’s warehouse network for physical metal storage (with locations in Chicago, Detroit, Baltimore, New Orleans and Owensboro, Kentucky) as being readily accessible. “You can get your metal out in a few days [with] no long queues,” said Penha, likely referring to complaints that have been made about the LME warehouse in Detroit.

Andre Marshall of Crunch Risk LLC, Houston, said even more volatile than pricing in the aluminum scrap market has been the fluctuating spread in the Midwest Premium (the cost of shipping aluminum from LME warehouses to locations in the Midwestern United States).

He said the market uncertainty is likely to lead to more inquiries from scrap traders to risk management service providers like Crunch Risk. “Companies come to us because they have something they want to hedge. It’s a learning process, it’s not a switch you just turn on.” Penha added that the CME likewise hosts tutorials, webinars and seminars to familiarize new users with hedging.

Panelist Muryam Bayram, who works from Germany for United Kingdom-based scrap processor European Metal Recycling (EMR), said currency fluctuations have provided another source of volatility for aluminum traders.

In addition to price volatility, reduced scrap supply has been the foremost challenge facing EMR and other aluminum scrap processors, said Bayram. Ferrous prices that fell from $400 per ton at the beginning of 2015 to less than $200 by the end of the year “has an influence” on “the small suppliers bringing in scrap,” he said. Bayram estimated that flows from that segment of the supply chain in Europe (both ferrous and nonferrous) could be down as much as 40 percent from 2014 levels.

Regarding China’s role as an ongoing buyer of aluminum scrap and the health of the Chinese economy, Bayram said a statistic he looks at is the time lapse in invoice payments. Citing data from French insurance firm Euler Hermes, Bayram said the average invoice payment time in China has grown from 55 days in 2007 to 83 days in the first quarter of 2016. “Banks still don’t trust other banks” in China, said Bayram, adding he also has seen “a lot of cutting back on credit lines.”

Regarding aluminum’s near-term future, Marshall said indicators he looks at lead him to believe premiums for the metal could rise, if not the exchange price. He added that he “doesn’t see a fundamental supply-demand imbalance anywhere in the world” for aluminum.

Bayram recently attended a metals industry conference in Iran. He said if that nation avoids new sanctions, then as a youthful country of 80 million people there are likely opportunities for metals production growth there.

He said it is likely scrap recyclers “will never have again the fantastic markets of 2000 to 2008.” Bayram added, “If you hold with one hand onto the past, you can’t have both hands free for the future.”

The 2016 Institute of Scrap Recycling Industries Inc. (ISRI) Annual Convention was April 2-7 at the Mandalay Bay Convention Center in Las Vegas.