Elementary economics: slumping industrial production and demand from China is pinching aluminum scrap supply.

The scrap metal industry exported a record amount of material--nearly $1 billion--to China in 2003. The country's insatiable hunger contributed to historically high prices for some secondary commodities, such as copper. Aluminum and other secondary metals benefited from moderate pricing increases throughout the year.

However, not all effects on the scrap metal industry were rosy, as the basic economic forces of supply and demand took hold. Aluminum scrap supply was constrained thanks to reduced industrial scrap generation in North America and increased demand from China. This demand led to higher prices for aluminum and increased competition for secondary metal units; it also served to slim margins for secondary aluminum consumers.

YEAR IN REVIEW. Stephen A. Moss, vice president of metals broker Stanton A. Moss, Bryn Mawr, Pa., and chairman of the Aluminum Committee of the Institute of Scrap pricing Recycling Industries Inc., says, "For the first half of the year, [aluminum pricing] was pretty flat," Moss continues, adding that by year's end, aluminum pricing had increased 20 percent based on London Metals Exchange (LME) pricing.

"Ingot pricing did not have the dramatic increase that scrap had," a source at a secondary smelter based in the Midwest says. "The aluminum finished goods market in the United States just did not have the demand," he says.

Elliott Goldberg of Northeast Metal Traders in Philadelphia says aluminum pricing experienced "fairly steady" escalation in 2003. "I think the prices reflect the true price that was out there."

Michael Dorfman  of metal trader State Metal Industries, Camden, N.J., says big lots up for bid were going at a premium, while other grades were being discounted. "It seems like in the 380 market, any good, paying accounts were being sold at a discount," he says. Dorfman explains that this is because "there is a lot of shaky money around. If someone is a good, solid account, it seems like the people were afraid of missing the business."

Apart from this anomaly, secondary aluminum pricing appears to be tracking the LME fairly closely, though supply and demand do exert an effect.

"Some grades of scrap are tracking LME pricing closely, like your segregated alloys, your 3000-, 5000-, 6000-series alloys, but the spread basically varies based on individual consumer demands," Moss says.

Dorfman says that while the primary metals usually set the tone for secondary metals pricing, the gap between primary and secondary aluminum pricing has lessened in light of the demand for scrap.

The secondary smelter agrees. "There is a general tracking [of the LME] with the secondary commodities, but, pretty much, supply and demand dictate the pricing of secondary aluminum," he says.

All fingers point to China as exerting the greatest force on secondary aluminum markets.

OUT OF BALANCE. Goldberg says aluminum scrap exports going to Indonesia, Taiwan and, primarily, China, have kept prices up for the material. "I think the demand from Asia has really reduced the supply for the mills in this country, especially at the secondary level."

"China has strongly been pushing the demand factor," Moss says. "Although at times they have been in and out of the market, overall their interest in aluminum scrap keeps growing year over year."

Moss doesn't see China's demand for secondary aluminum relaxing soon. "They are using the scrap not only to produce parts or items that they are going to export," he says, "they also need aluminum scrap to help build their domestic infrastructure and for their domestic needs."

"Domestically, the supply seems to have dwindled, as 2003 was a weak year for industrial production," Moss adds.

Improvements in the manufacturing process also serve to constrict supply. "Companies are getting better at creating less house scrap in the process and are reusing the scrap that they are creating within a closed loop," Moss says. "Also, things like aluminum cans keep getting thinner and thinner each year, therefore, less aluminum is being used to produce aluminum cans."

While Goldberg describes the aluminum scrap supply in North America as "extremely tight," he foresees supplies easing later in the year. "I think toward the middle of the year, supply will become more plentiful. As we get out of the cold weather, it will help," he says.

THE YEAR AHEAD. Moss notes that a healthy U.S. economy does not necessarily guarantee a healthy year for aluminum in 2004. "It depends on where there is strength in the economy, and it depends on if the aluminum industry can produce finished products at a reasonable price," he says.

Scrap availability also depends on which segments of the domestic economy experience growth. If it's manufacturing based, which would generate more aluminum scrap, then the tightness will ease. In my opinion, it is not going to be manufacturing based," the secondary smelter says. "I would say that the tightness is going to continue through 2004."

Moss says scrap aluminum will likely be tight in 2004, "as Chinese demand doesn't seem to be waning, and domestic demand doesn't seem to have dropped off below 2003 levels and may increase slightly this year."

Goldberg foresees the auto industry showing the greatest increase in aluminum consumption during the year, with construction markets "picking up an adequate supply," be says. "I think 2004 will be a strong year," Goldberg says, predicting that secondary aluminum markets will perform similarly to 2003.

DRIVING ALUMINUM DEMAND

Ferrari has selected Alcoa Advanced Transportation Systems as sole provider for the next generation aluminum space frame for its new 612 Scaglietti, 12-cylinder, front engine 2+2 sports car.

"The Ferrari 360 Modena has successfully demonstrated the capability of a highly engineered aluminum structure to significantly increase interior space and occupant comfort while not only maintaining but improving drive performance," Rick Milner, president of Alcoa Automotive Transportation Systems, says. "We also believe that the demonstrated safety performance of Alcoa's aluminum structures will be very important in helping Ferrari satisfy Europe's demanding safety requirements."

Production of Ferrari's space frame components illustrate Alcoa's pan-European manufacturing and supply capabilities. Cast, extruded and fabricated components are produced in Hungary, Germany and the Netherlands and shipped to Italy, for assembly at an Alcoa facility inside Ferrari's Scaglietti Works.

Since 1994, Alcoa has supplied Ferrari with more than 12,000 frames for the Modena, according to an Alcoa release.

GETTING TWITCH-Y

Because of slumping industrial scrap output, aluminum twitch, recovered from shredded autos, is becoming an important source of secondary aluminum.

Stephen Moss of Stanton A. Moss, Bryn Mawr, Pa., says aluminum twitch is one of the only items that secondary smelters can buy in large volumes on a monthly basis. However, Moss cautions that quality varies from shredder to shredder. In addition to quality concerns, twitch can also present safety-related issues if air bag canisters and other sealed containers are not removed, he says, causing explosions in the furnace during melting.

Michael Dorfman of State Metal Industries, Camden, N.J., also notes the importance of twitch and says it is becoming more available as iron prices increase. "It is an expensive item, but I think that most of the secondaries have become somewhat dependent on it," he says.

"Shredder scrap is definitely becoming an important source of aluminum scrap," a secondary smelter based in the Midwest says. "And it's one product that the primary mills that buy a lot of scrap have not learned to use yet," he adds.

"We can still use it for making the die-cast alloys. If you get into the low copper alloys and more specific higher grades, we can't use it," the secondary smelter says of twitch.

The author is associate editor of Recycling Today and can be contacted via e-mail at [e-mail].