Follow the leader.

Copper scrap might catch all the headlines, but the aluminum scrap market also has been on quite a run as of late. Of the processors contacted, most acknowledge that prices have been climbing quite sharply during the past several months. In fact, a number of handlers of the grade note that the London Metal Exchange, one of the key indicators for the nonferrous metals market, is "out of whack." Spreads are widening, and hedge funds are more active in aluminum.

In the West, one broker notes that aluminum scrap has yet to see a pullback, resulting in a fairly steady market for many of the grades.

One scrap dealer notes that during the past six months, prices "have gone nuts."

With such high prices, many recyclers say they are quickly moving most of the aluminum scrap they get to end markets. There is very little inventorying of material as of late as concerns about a possible correction leads more recyclers to move everything they can process.

China, the key driver in many metals markets, also plays a factor in the aluminum scrap market. Continued buying to fill Chinese orders is resulting in tougher competition for domestic secondary smelters as they compete for the same material, but with offshore buyers offering higher prices.

The domestic manufacturing industry, which has suffered from more business heading offshore during the past several years, is improving. Recent figures from the National Association of Manufacturers (NAM) show domestic manufacturing up close to 9 percent from November 2004 to November 2005.

Forecasting for 2006, NAM notes that after growing by 3.6 percent in 2005, the gross domestic product (a key indicator of economic health) will moderate to 3.3 percent growth in 2006 (mainly in light of slow consumer spending in the first quarter and a pullback in residential investment). Going further out, NAM expects 3.6 percent GDP growth in 2007.

While the strength in the offshore market is pushing prices up and the domestic manufacturing base has improved, secondary aluminum smelters are still having difficulties. With prices high, some consumers are finding it more difficult to maintain their margins. The result could be reduced demand from domestic smelters.

Adding to the difficulties for many domestic smelters are the well-publicized problems that General Motors and Ford Motor Co. are having. One Midwestern aluminum scrap broker says the uncertainty surrounding these two atuomakers creates uncertainty within the die cast industry, which, in turn, is spreading to the secondary smelting industry.

Domestic secondary smelters have to match the prices offshore consumers are offering. However, margins are difficult to come by for many smelters that are tethered to the domestic auto industry. With continued weakening on the parts of Ford and GM, some secondary smelters are contemplating closing down some lines or shifting production to other end products.

Adding to the general uncertainty in the aluminum market is the growing presence of hedge fund trading. As they play a greater role, a number of scrap dealers note that traditional fundamentals "are not there."

Despite the stronger pricing for aluminum scrap, most handlers of the grade say that there is little excess material. Supply remains tight in most areas.

In the South there is some potential additional supply following Hurricane Katrina. While cleanup continues, a new supply of obsolete scrap could be added to the mix at fairly Iow prices. For some scrap dealers in the South this could be a chance to obtain aluminum (as well as other metals) at sharply reduced prices.

The upside may be a little further down the road for smelters.

(Additional news about nonferrous scrap, including breaking news and consuming industry reports, is available online at www.RecyclingToday.com.)