ISRI Commodities Roundtable: Aluminum Prices Face Steep Headwinds

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On the final day of the Institute of Scrap Recycling Industries’ Commodities Roundtable at the Chicago Hilton, the state of the aluminum scrap industry took center stage as dealers, economists made remarks about the state of the industry and the predictions, like those other scrap prices, were pretty grim.

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While there was optimism about aerospace and automotive uses of aluminum, the panelists were quick to temper expectations of a rise in prices because of oversupply.

Oversupplied

“Aluminum, going back 20 or 30 years, has had the best demand of all of the commodity metals,” said Tim Hayes of Lawrence Capital Management, one of the panelists. “Prices haven’t done much despite such strong historic demand. There is potential with the F-150 and all, but supply is more than keeping up with it. Even when all the metals were going up, recently, aluminum was much more restrained because of the supply. If tomorrow we shut down all smelters globally, how many days of inventory do we have to exhaust current demand – 94 days. That will come down to 80 by 2017.”

CME Aluminum Futures Contract

The panelists were also subdued about the hedging ability the new CME Group Aluminum Futures contract provides.

“Midwest aluminum contract is fairly liquid. We do see some ability to hedge limited quantities here in the Midwest on the CME contract,” said Edward Meir director of the commodity research group at INTL FC Stone. “The LME is coming in with its own contract and CME is coming in with more aluminum contracts. It’s too late. People needed these contracts before the Midwest premium’s price collapsed.”

Meir also said the new contracts allow stock financiers the ability to hedge the premium. Financiers might use the futures contract to remove risk from metal trades.

What Does This Mean for Scrap Dealers?

Roundtable panelist Alan Alpert, president and owner of Alpert & Alpert Iron & Metal in Los Angeles, advised scrap dealers to use the current slow recovery to make their businesses leaner and stronger.

“This is an opportunity to look at your costs and operations,” Alpert said. “There is definitely room for investments to be made to prepare for next upturn. Keep talent around. Don’t be a public company; I would much rather be reporting my financial results to my cousins and sisters rather than the Street or the Glencore board of directors.”

The China Question

All of the panelists agreed that China is fueling aluminum oversupply and that it would likely continue to grow without cutbacks by Beijing.

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“My concern is we are still not the seeing Chinese cutting back any supply,” Meir said. “There is a 20% year-over-year growth rate. 1.7 million tons of Chinese metal will flow out into global markets this year.”

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