Cash flow difficulties pressure Brazilian aluminium scrap dealers

Aluminium scrap dealers selling to large recycling companies in Brazil are facing cash flow difficulties because they have been forced to receive delayed payments, which may lead to more severe outcomes, like company closures, sources told Fastmarkets

The scrap market has always worked on cash payments, with hardly any credit operations within the recycled material collection chain, Luiz Alberto Lopes, president of the Brazilian Association of Metal Recyclers (Abrem), told Fastmarkets.

“But the final scrap dealer, who is selling to the industry, is now being forced to make deals to be paid with invoices by 30 or 60 days. These people complain a lot, because they are forced to buy all their material in cash and then have enough capital to fund this for the industry,” Lopes said. 

Scrap dealers usually pay the collector – the person at the beginning of the chain, who gets the scrap from the street and landfill and takes it to the recycling center – in cash in the form of a 100% ready payment. They then process the scrap and sell it to the industry, with some companies and participants now only paying after many days have passed, destroying the scrap dealers’ cash cycle. This means it’s now necessary for scrap dealers to have enough working capital to keep their businesses working for one or two months before they get paid, Lopes explained.  

“This is deadly for scrap dealers, because it impedes cash flow. Scrap dealers are now fighting to get paid in cash again,” a trader source said.

The scrap market is frenetic, and scrap dealers are more concerned with daily cash flow than they are with profitability, the trader said, adding that the main reason large recyclers are choosing to pay with delay is because the market is slower.

“Large companies like Novelis and Latasa are quick to hold market prices lower, [i.e. what they pay for scrap metal]. However, the time has come when they can no longer hold the price. So, they decide that they will pay after [a number of] days,” the trader said.

A Latasa spokesperson told Fastmarkets that the company has been following the normal flow of the scrap market, payment within one or two days, depending on what time the invoice is issued during the day.

Novelis also said that the information does not apply to the company and that there has been no change in their payment terms.

On the other hand, a scrap dealer confirmed to Fastmarkets that he has been experiencing problems with elongated cash flow, with large companies paying after 180 days in some instances.

“This delays the foundry’s cash flow and affects the entire chain, for me and other base scrap dealers. We have felt this especially since 2023. We are trying hard to solve this problem about the cash flow,” the dealer said.

Impact on the market

The problem of cash flow is quite symptomatic of how the market is behaving currently, according to Lopes.

“When the market is hot, big companies have a lot of orders, so they are forced to buy scrap in a shorter period of time or in cash. However, when the sales are low and at a standstill, companies end up paying for it over a period of time,” Lopes said.

During periods when the aluminium industry needs a lot of metal, companies make money advances to some suppliers, especially those with whom they already have a strong relationship, Lopes told Fastmarkets.

“There are times when scrap dealers are funding the industry and there are times when the industry funds the scrap dealers. But we don’t have a high demand now, so it’s the time for scrap dealers to complain,” Lopes said.

But, according to Lopes, the pressured cash flow might have consequences.

“Some scrap metal companies, especially the small and medium ones that do not have enough working capital to finance this operation, could close,” he said. 

Lopes added, “When demand is not heated, it is difficult for the reduction in supply to affect prices. Also, it is important to [note] that big companies are the ones who set the prices in the scrap market.” 

Furthermore, Lopes mentioned that one of the biggest problems for the scrap market is tax complications.

“When the material begins to enter the production chain, taxes are already levied. So, this material already paid taxes when it was useful, it already had a long life cycle. There is no reason for burdening this segment again,” Lopes said, arguing that Abrem defended in the National Congress of Brazil that the recycling chain should not have to pay tax until it produces the alloy ingot material, after which the taxation process can begin.

“But the [Brazilian] government doesn’t want to, and this makes it very difficult, because it gives room for dishonest companies and entrepreneurs to use tax subterfuge to gain advantages in this market,” Lopes said. 

Abrem created a tax compliance booklet and distributed it to the entire industry segment, but there are still many businesspeople who choose to evade taxes, argued Lopes.

Demand for scrap in Brazil

In 2023, Brazil recycled 920,400 tonnes of aluminum scrap; 715,000 tonnes of domestic scrap and 205,400 tonnes of imported scrap, according to data compiled by the Brazilian Aluminum Association (Abal), the Special Secretariat for Foreign Trade and International Affairs (SECINT) and Abrem.

In the same period, 32,200 tonnes of aluminum scrap were exported, the data showed. 

Brazil produces around 800,000 tonnes of primary aluminum and consumes roughly 1.6 million tonnes of aluminum per year. Per capita consumption is in the range of 7.5 kg per inhabitant per year, Lopes told Fastmarkets. 

The largest aluminum scrap market in Brazil is generated from used beverage cans (UBC). Of the 900,000 tonnes of recycled scrap generated per year, more than 450,000 tonnes are generated from aluminum can scrap, and the rest is mostly aluminum extrusion profiles and sheets, among others.

According to Lopes, the aluminium end market segments with the greatest growth prospects in the coming years are rolling and extrusion, due to the increasing use of aluminum rolled products and extrusions in transportation – namely automobile, agricultural, naval and aeronautical usage. Increased usage has also been seen in civil construction, the construction of agricultural barns and the solar panel industry, among others.

In 2022, the recycling rate for cans was 100%, according to a survey carried out in partnership by Abal and the Brazilian Association of Aluminum Can Producers (Abralatas).

The 2023 index is expected to be released in April 2024.

“For other types of aluminum scrap, there is no specific survey. However, due to the high added value of aluminum, it is unlikely that any aluminum waste is seen here in Brazil, and we estimate that the recycling rates for other types of scrap of aluminum are very close to the index of the aluminum can,” Lopes told Fastmarkets.

Furthermore, Lopes explains that the scrap has a hierarchy on the market, depending on the amount of alloying elements it contains.

“Rolled materials have a low concentration of alloying elements, for example. Aluminum extrusion profiles also have a low concentration of alloying elements. Meanwhile, cast aluminium scrap has high levels of alloying elements. This creates a hierarchy and pricing in the scrap market. Purer scraps, closer to the primary metal, end up having a higher price. There is a great market for sheets, profiles and aluminum cables, which are more similar to the primary market,” Lopes said.

Fastmarkets does not yet assess aluminium scrap premiums in Brazil, but it does assess some in the US.

Prices for smelter-grade aluminium scrap and secondary alloys were largely rangebound in the week to March 21.

“The secondary aluminium [price] is fairly stable, with some upward pressure from export markets,” one source told Fastmarkets. 

Fastmarkets’ price assessment for aluminium scrap used beverage cans, domestic aluminium producer buying price, fob shipping point US was $0.77-0.81 per lb on Thursday March 28, stable since March 21, when it increased 1.28% from $0.76-0.80 per lb on March 14.

Fastmarkets’ price assessment for aluminum scrap old sheet buying price, delivered to Midwest secondary smelters, was $0.71-75 per lb, stable since February 22, when it increased 2.82% from $0.69-0.73 per lb. 

Recyclable materials are in high demand as the world shifts toward building a more sustainable future. Inquire about our scrap and secondary prices today.

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