Increase In Aluminum Recycling Depends On China — Societe Generale

As the global economy rebounds and demand for aluminum rises, the need for recycling of scrap metal increases, and China must play a big role in that if the secondary market is to expand.

David Wilson, director of metals research, at Societe Generale, said recycling needs to take off in China, where little recycling is done so far.

“Brazil is the best at recycling. They have very high rates…. It’s an easy metal to recycle. We’ll see some increase in recycling in China as the amount of available scrap picks up. It’s clear the life span of buildings in China is shorter than in the West. There’s a 10-20 year life span as some weren’t built well and some are outdated. So I have a feeling that scrap supplies will increase. But it’s coming from a very low base,” he said.

Wilson spoke to Kitco News on the sidelines of the Harbor Aluminum outlook conference in Chicago this week.

Research from other firms shows that China’s aluminum recycling industry is underdeveloped in comparison to other countries. According to The Beijing Axis, Chinese refiners and smelters are not equipped with advanced technology to recycle and treat residues, although there is some movement to recycle more. The Beijing Axis said only 20% of China’s total production of aluminum is recycled.

Conference hosts Harbor have a bullish view toward aluminum, saying prices could go “north of $3,000,” but many participants at the conference held a more tempered view, including Wilson. He estimates an average price for aluminum in 2011 at $2,610 a metric ton, and $2,690 in 2012.

Wilson said the Chinese market hasn’t been affected yet by widely discussed energy consumption curbs, although those curbs are expected to have an impact on production levels in June and July. On that note, China has restarted about 1.1 million metric tons per year of energy-related second half of 2010 cuts this year, yet it still has around 4.4 million tons annually of idled capacity. Total global capacity is currently around 8.9 million tons annually.

Demand is projected to grow faster than it has in the past, so consumption will eat through this new metal. Wilson projected that global demand growth will average 7.6% annually from 2010 to 2105 compared to 5.5% over the last decade. Substitutions of aluminum for copper and greater usage in vehicles are some of the ways demand will increase.

That will push aluminum into a deficit by 2013, but the firm doesn’t expect it to last long, given capacity utilization rates of 85%. Wilson said surpluses in aluminum are more common than deficits, noting the market has been in surplus 16 of the last 19 years.

WAREHOUSING WOES

Much on- and off-topic discussion at the conference was related to the London Metal Exchange’s Detroit warehouse, where there is a severe backlog to remove metal. Some market users say the long delays in removing metal has artificially pushed up premiums for physical delivery. The LME has made some changes in how metal is moved from the warehouses, but those won’t be in effect until April.

Users of the metal say that only the minimum amount of metal is being moved out of the Detroit warehouse, which is 1,500 metric tons daily, and that much more can be moved. Given the current amount stored, if only the minimum is moved daily, it would take three and one-half years to move it all out, market participants said.

Some blame the owner of the warehouse, Metro International Trade Services, which is owned by a unit of Goldman Sachs, for intentionally slowing down aluminum movement in order to make more money. Warehouses get paid to store metal.

Wilson said he understands it takes time to move metal from the warehouse to the trucks to make deliveries, but at the same time there should be some efficiencies that can be made to reduce the backlog. One of the issues hindering movement is that specific metal is assigned to specific holders and that if the particular metal is at an inconvenient place, it takes extra effort to remove it. Wilson said  that shouldn’t be the case.

“It really defeats the whole purpose of the notion of a commodity. The whole point is they’re all the same,” he said.

Warehousing makes sense with interest rates near zero, but if interest rates start to rise, particularly in the U.S., it might make holding metal less attractive. Yet, Wilson and others suggested that if markets remain in contango, meaning prices rise along the forward curve, it still makes sense to warehouse aluminum.

“It’s almost self-balancing, provided there is not a huge rise in rates,” he said.