COMMENT: Tight margins cause mounting casualties in secondary aluminium

The gloss has come off the secondary aluminium markets in the UK and Europe this year, and we are now beginning to see the cracks that have been forecast since producers started struggling for an adequate margin last year.

The gloss has come off the secondary aluminium markets in the UK and Europe this year, and we are now beginning to see the cracks that have been forecast since producers started struggling for an adequate margin last year.

During its daily conversations with market participants, Metal Bulletin has heard more and more about the likelihood of casualties in the market, as scrap raw material prices rose on a lack of supply and secondary ingot prices were capped by low London Metal Exchange primary aluminium prices.

A number of smaller producers are no longer in operation, victims of the lingering low margins. At the end of June those margins claimed a major scalp, as Germany’s Oetinger made a request to begin insolvency proceedings in Germany.

There have been indications of the difficulties making money in this business over the last several months, and Oetinger was one company that decided at the end of May to refuse business at levels that offered no real margin over their production costs.

Scrap dealers have also been hit. Falling scrap volumes due to lower manufacturing rates and the increase in closed-loop supply deals have left many struggling to make money with what has become a high-volume business model.

There have been casualties here, too. Among the bigger names, Sita UK – one of the UK’s largest metals recyclers – launched a formal review of its metals business last week, and its seven yards could close following that review.

No one in the market expects Oetinger and Sita to be the last companies to be so affected among the market’s ingot producers and scrap merchants.

There seems little prospect of the margin situation being resolved. Although the Oetinger news has seen ingot prices rise, those prices are capped by low LME aluminium prices, and as long as scrap supply remains tight so scrap prices will remain high – in many cases very close to parity with primary aluminium.

This is not the tail end of a tough period in the market.

It is the beginning of a new one.

Jethro Wookey 
jwookey@metalbulletin.com
Twitter: @jethrowookey_mb

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