2017 PREVIEW: Is secondary Al alloy going back to the future?

Secondary aluminium ingot prices have not been below London Metal Exchange aluminium prices since primary metal spiked above $3,000 per tonne just before its precipitous collapse in 2008, but they are below them again now.

The question is whether this is a short-term phenomenon that will be resolved with a sharp price correction in the new year, or a systemic shift to a more segregated type of aluminium market not seen for several decades.

Secondary aluminium alloy shouldn’t trade below primary aluminium. Essentially, it is primary aluminium with alloying elements added – chiefly magnesium, silicon and copper – almost all of which are more expensive on a per-unit basis than the light metal.

While aluminium prices have climbed consistently throughout 2016, Metal Bulletin’s European DIN226 diecasting alloy ingot price has been broadly flat through much of the year. But it started to fall in August and, although prices have risen slightly in the past month, they remain below levels from earlier in the year.

“I can’t believe where ingot prices are,” a UK-based ingot producer said. “I understand the market will have blips but this is not a blip. Scrap prices are high, LME prices are high, but ingot prices are low. It cannot continue like this.”

Pure-grade scraps are already off-limits to secondary producers as their prices are usually derived from the LME primary aluminium price, and there is no margin available to the secondary producers now. Such a situation is unsustainable and will result in production shutdowns, leading to market shortages if it continues any further, some argue.

“There will come a point very soon, with people needing to buy in the first quarter of 2017, when prices will go back to a realistic LME-plus level,” a second UK-based ingot producer said.

But there is a possibility that prices will not recover back above LME aluminium prices. And, despite what many less experienced market participants might believe, this would not be without precedent, either in Europe or in the USA.

“If you look at the data starting in the 1980s it shows that A380 alloy [the US market equivalent of DIN226 in Europe] prices below LME P1020 aluminium prices for probably 90% of the time, and significantly below them for 75% of the time,” Kevin Moore, president of All Raw Materials Consulting and General Motors’ former chairman of strategic hedging, told Metal Bulletin.

“There were extended periods of time when A380 prices were $0.20 per lb [$440 per tonne] or more below the P1020 prices,” he added. 

Alloy prices could trade below aluminium prices in the past because of segregation in the scrap market. Secondary producers had their scrap raw material and remelters had theirs, and the two would not mix.

“In the past most scrap was not clean enough for the primary mills, and they would not even consider using it,” Moore said. “There could be an oversupply of scrap and an undersupply of primary metal, and that would create big price gaps.”

This time around, DIN226 alloy prices have been forced below LME aluminium prices because production has raced ahead of demand in Europe and because the strategy of many producers’ dictates the necessity of regular sales – whatever the price.

“DIN226 is where it is because a lot of producers have been chasing a market that has grown but not as fast as production has grown,” a third producer said. “It’s driven by companies with a lot of debt, and that debt needs servicing. So they’ve no choice but to produce and sell at almost any price.”

Consequently, there is a trend that is making the market start to look reminiscent of those eras when secondary alloys would trade consistently below the LME aluminium price – a segregated scrap market with no crossover between the primary and secondary buyers. Given this alongside adequate supply of the lower-grade scraps, secondary aluminium alloy prices could conceivably trade below LME aluminium prices over the longer term.

But while that may work for DIN226 alloys, most secondary producers also manufacture alloys that can only be made from the higher-grade scraps that primary producers have been buying in ever-increasing volumes over recent years.

“One alloy we produce with very low zinc and iron content requires at least 70% primary scraps,” a north Europe-based producer said. “We have to fight with primary producers for this scrap. We don’t have a choice.”

But there may be a source of high-grade aluminium scrap that is not of use to primary remelters that could provide the necessary volume for secondary producers to make and sell even the higher grade alloys at sub-LME aluminium prices. That source is process scrap from the automotive industry.

“Many veterans in the secondary business are not convinced the automotive post-consumer scrap will be made clean enough to be used in primary mills as the cost to do so for mixed materials will be too high,” Moore said. “Given that, many suspect that an oversupply of ‘low grade’ scrap could occur again, driving [secondary alloy] prices below [LME aluminium prices].”

If such a situation were to last for an extended period, however, scrap sellers would probably invest in scrap-cleaning technology, Moore added.

“The price difference has a floor because at some point it becomes worth the cost to clean up low-value scrap for primary mill usage,” he said.

But if LME prices do not push high enough to justify the costs of cleaning the auto process scrap, the re-segregation of the scrap market – between scrap for the primary mills and that for the secondary smelters – could become established both for DIN226 manufacture (as well as LM24 ingot manufacture in the UK) and for producers of higher-grade secondary alloys too.