A recent article in Reuters reports the news that Novelis is making good progress on its target to source nearly all of its metal from recycling by 2020, cutting reliance on primary material caught up in warehouse backlogs, an executive said.
This is good news then, not just for Novelis, but for the environment. Recycled aluminum uses a fraction of the energy to turn it into new product than is required to produce primary metal and, hence, is more energy efficient inherently than in finished than product from the primary metal production route.
Novelis makes much of this fact, both in the article and in it’s brand image as a greener aluminum producer than its peers. We wouldn’t take issue with this; it is one of those rare coincidences of sound corporate economic strategy running in tandem with good environmental practice. While we don’t doubt the former is what drives the firm’s endeavors, that doesn’t negate the secondary benefit of the latter in the least.
The article does wax lyrical, though, about how Novelis’ focus on scrap metal will insulate it from the volatility in aluminum prices. Hold on just a moment, there, Novelis. As is known by anyone who has bought aluminum can scrap, Novelis’ largest scrap product source – they already recycle 42 billion cans a year with major expansion plans still to come – the price is anything but constant.
Indeed, prices for all aluminum scrap move daily in line with the dynamic of the underlying LME price – against which scrap is constantly in competition for customers – and the quite distinct and separate supply and demand dynamic of the scrap market, itself, which may be influenced by pressures such as weather. See this winter’s severe weather inhibiting all forms of scrap collection, for a case in point. These wild cards are not significant factors for the primary market.
The net result is a price that is far from constant and plays a subtly different tune than the London Metal Exchange price. The scrap price is not as readily hedgeable, either, although many would argue that the primary LME aluminum price has not been readily hedgeable for some years due to the distortion of the physical delivery premium to the real price for primary aluminum compared to the LME price, an argument we would have a lot of sympathy with.
Still, Novelis’ focus on scrap as a supply source does set them apart from their peers. Scrap prices vary considerably depending on the form and grade but are nearly always cheaper than commercially pure primary ingot. Depending on the cost of purification processes – waste, refining, alloy adjustment – in which Novelis has built up vast experience, this gives it a distinct cost advantage.
Some forms of scrap are two-thirds the price of primary metal, before any physical delivery premium is taken into account and, no doubt, that is a factor in the firm’s capital expenditures program in recent years. This has tripled their recycling capacity since just 2011.
Another factor is security of supply. For a company without its own upstream smelters, control of scrap supply and refining becomes crucial to ensure a stable supply base. The announcement of an expansion from using mainly recycled beverage cans as a supply source, to allowing access to greater quantities of automotive scrap makes good sense. Novelis is already one of the world’s leading automotive sheet suppliers, to recycle the waste from your own clients is, to use that dreadful phrase, a no-brainer.
So while we might take issue with the suggestion that reliance on recycled aluminum will insulate Novelis from fluctuations in metal cost, it is a corporate strategy that will continue to offer the firm some unique advantages over its peers, and has the added benefit of giving great brand support from customers who believe green or environmental considerations should sway purchasing choices.