Market for nonferrous foundry ingot remains volatile.

Nonferrous foundries need to pay close attention to what is happening to their alloy costs by outside commodity forces.

Purchasing agents closely following their buying of non-ferrous foundry grade ingot are witnessing some interesting trends. In addition to regular supply and demand factors, pressures such as import agreements and commodity-driven elements such as investments, pension funds and commission houses are making things a little tougher on nonferrous foundries as they purchase raw materials.

A bit different from the ferrous side, smelters, ingot makers and others all have their hands on the product before it arrives at the foundry. Unlike their ferrous counterparts who purchase scrap directly, nonferrous foundries pay a middleman--the smelters--who buy nonferrous scrap and melt it into foundry grade ingot.

Aluminum

The price of secondary aluminum seems to follow where primary goes, according to Patricia Plunkert, aluminum specialist at the U.S. Bureau of Mines. "All past history shows that it tracks right along," she said. "Despite high inventories of primary aluminum, prices continue to rise, and with them go secondary prices, which have been traditionally more supply and demand oriented than market-driven."

Average monthly London Metal Exchange (LME) primary aluminum prices, as reported by Robert Garino, director of commodities. Institute of Scrap Recycling Industries, held above $0.60 per lb for the third consecutive month in July. He noted that the near-term U.S. market outlook for prime metal and scrap consumption is positive.

"The high price is because of wishful thinking," Plunkert said. "There's an oversupply of aluminum in the world market, but the price is going up because of anticipation that the market will reach a balance soon. There are also rumors in regard to speculators, pension fund investments, etc.

"Another factor is that copper prices are also rising, and in some cases pulling other metals such as aluminum with it. Years before, it was easy to pinpoint price factors. Today, there are so many variables, it is difficult to put a finger on it."

Aluminum Scrap

Most scrap recyclers receive scrap in railroad cars and trucks, although more and more are received in bales, said Dick Cooperman, executive director, Aluminum Recycling Assn. Aluminum scrap also arrives in a conglomeration of housing siding clips, beer kegs, lawn chairs, etc. It is hammer-milled to break it into fist-size chunks and passes through a magnetic separator (to remove iron and steel) before entering the furnace.

Cooperman said smelters buy from brokers, scrapyards and occasionally the defense people, when they're selling. It's seldom that a secondary producer goes to a manufacturer that generates scrap, but it does happen on occasion.

The reason for the higher prices foundries and forging operations are paying for secondary aluminum, Cooperman said, is because of the high demand of scrap and the difficulty in buying it. "Scrap just isn't plentiful," he said. "You can get it but you have to bid for it.

"But secondary producers haven't always responded to that curve. If margins are good, they're shipping high quantities and they're making money, they realize the downside and don't want to gouge."

Shipments of Recycled Aluminum: Specification Ingot (Aluminum Recycling Assn.)

In Pounds (000)

Year     1st Qtr.     2nd Qtr.     3rd. Qtr.     4th Qtr.     Year to date

1984     453,141      441,656      430,907       438,377       1,764,081
1985     450,930      453,724      423,076       443,983       1,771,713
1986     488,021      427,887      379,817       413,352       1,709,067
1987     499,009      456,759      497,390       542,031       1,945,189
1988     535,371      542,613      555,985       570,372       2,204,341
1990     596,044      540,590      503,555       537,397       2,177,586
1990     582,256      579,607      547,174       579,443       2,288,480
1991     517,370      522,164      513,057       361,265       1,913,856
1992     554,261      576,557      517,850       587,195       2,235,863
1993     605,463      587,512      549,935       642,086       2,384,996
1994     643,294      661,639           --            --       1,304,933(*)

* as of June 30, 1994

Foundry Perspective

The price of aluminum, which has, become a commodity over the last decade, can be very volatile, according to Jack Moore, president of Stahl Specialty Co., whose 800-employee permanent mold foundry purchases large quantities of 300-series aluminum. "People controlling the price aren't necessarily the people who use it, such as foundries, but instead are those who buy and sell commodities, much like the stock market," he said.

During parts of 1990-93 when international factors drove down the price of secondary aluminum, foundries were able to purchase aluminum inexpensively, and in turn deliver a less-expensive product to the customer. Most of the imported aluminum came via the Soviet Union, which was pumping aluminum into the LME Warehouse System to generate capital for its collapsed economy. The Soviets, Moore said, have vast amounts of bauxite, which is used to produce alumina for aluminum.

North America's aluminum producers couldn't compete with prices from offshore producers, however, and lobbled the government to slow the inflow of aluminum.

Coincidentally, North American producers shut down their pot lines at the same time, which along with reduced imports, further reduced the supply. "The price has gone up, and continues to go up," Moore said. "Prices now are 25-30% higher than in January, both for primary and secondary.

"Because of governmental actions and producers shutting down some pot lines, secondary aluminum now costs both us and our customers more. And there is still high demand driven by the auto industry. Because offshore producers don't have the large secondary base that we have here, they are buying our scrap that produces secondary aluminum as well, further aggravating the supply/price situation for foundry ingot.

"The question becomes: What will the customer ultimately pay for aluminum castings? It forces the engineers to go back and look at the design. When nothing has changed but the cost of the mate rial, they ask, 'what other materials can this part be made from that has more price stability and overall lower costs?' If they just went through a bad scenario with escalating aluminum costs, they might look at other competing materials, like engineered plastics, whose market cost may not be as volatile."

Moore said the problem doesn't necessarily go away for foundrymen when the cost curve moves the other way. When the demand for aluminum isn't as strong and the price goes down, the buyer may still be wary of purchasing the product in aluminum because of past experiences with its cost volatility. Worse yet, if the engineer has designed the product with another material, you've lost the opportunity--maybe permanently--to ever produce the part in aluminum.

Moore also noted that twice in the last 25 years, demand for secondary aluminum became so great that secondary prices actually went higher than primary aluminum. Secondary aluminum isn't available until its original life cycle expires, while bauxite can always be mined for primary aluminum.

"I don't see the situation remedied here in the short-term future because of U.S. restraints on incoming aluminum," Moore said. "And until North American producers restart their pot lines, demand will be greater than capacity unless we can bring more in from offshore producers."

Copper

Copper prices, which are currently $0.40-$0.50 higher than aluminum, are also affected by similar factors. According to Steve Ducharme, H. Kramer & Co., there are fewer secondary players on the copper alloy side. It's a strong market, he said, and copper is being bought and sold vigorously.

He said if foreign markets such as the Soviet Union and China need money, they'll dump copper ingot, which can bring the price lower in North America. If they decide to stockpile it, prices will go up.

"The current situation has caused the price to escalate $0.25 per lb more than just a few months ago," Ducharme said. "Our company has been very busy, which historically, this time of year would be relatively slow. Our foundry customers are also very busy."

He believes copper prices will remain relatively the same. "However, if interest rates are raised, it could slow up building, where most of our business is going right now," Ducharme said. "Without a doubt, we are directly affected by the economy."

He also noted that environmental factors will likely increase the cost of copper. "Lead is really pretty cheap to add for better machining," he said, "but as the pressure grows to replace it, copper-base alloys will get more expensive."

According to John Gross, The Copper Journal, copper inventories have fallen over the past six or seven months and price has risen. The demand for copper in the U.S. has been quite strongall year. In late August, it was about $1.10 per lb on COMEX (Commodity Exchange), up from $0.72 per lb in October 1993. Since then, it hit a two-year market high of $1.16 in late July. This was due to a stronger demand, which was draining inventories. Copper ingot, Gross said, is geared toward the COMEX price.

As for future trends, Gross said there's a sense of optimism among producers that prices will rise to $1.20, which will be a new high. Inventories will continue falling and the strength of the U.S. market will continue. However, he said there is talk that interest rates might soften demand, as well as reduced auto production and sales. As demand softens, inventories go up and price would come down.

"The market has been stuck at $1.06-$1.10 for several weeks," Gross said. "Which way it breaks will dictate prices for the longer term. If it fails to hold at $1.06, I think we'll see it heading toward the $1 level. If it breaks $1.10, I think we'll see it approaching the $1.16 record and possibly to $1.20."

Garino reported that after copper visited a two-year high of $1.16 per lb in July, COMEX and LME values have subsequently eased lower, suggesting that concerns over red metal availability have subsided. LME stocks have also recently moved higher. This view, along with commodity fund selling, caused LME prices to sink to a two-month low at the beginning of August.

"Further, domestic scrap discounts widened sharply in August, and second-half consumption prospects will likely be lower," said Garino. "Consequently, few are calling for prices to rally, but fewer still believe prices will slip below the psychologically important $1 per lb level."

Ducharme pointed out that "scrap prices and availability don't always follow COMEX. It doesn't follow supply and demand all the time. The price can be going down, but suppliers may sit on it and not sell until it rises, so you can't get it without paying an inflationary rate."