Scramble for Scrap Metal

Metal manufacturers are raiding the scrap heap to save money, pushing up demand–and prices–for recycled metal. Scrap prices are rising faster than primary metal, which is smelted for ore, in important markets like copper, aluminum and steel, as demand grows from U.S. manufacturers looking to save on energy costs and from Asian buyers that need raw materials of all kinds.

Copper and brass mills are forgoing their usual summer slowdown to snap up supply from Louis Padnos Iron & Metal Company's 18 scrap yards across Michigan, says Matthew Heitmeier, a marketing director at the company. And this spring, Novelis, an aluminum supplier to companies like Coca-Cola Co. and Ford Motor Co., said it plans to increase the share of scrap in its supply to 80% at the end of the decade, from about 34% today. The Atlanta-based Novelis is one of the world's largest producers of aluminum sheets used to make everything from chocolate wrappers to car doors, buying about three million tons of the metal a year.

"To get to the growth goals we have, we have to use recycled content," Novelis Chief Executive Phil Martens said in an interview. Melting down old brass door handles, aluminum beer cans and shredded steel car frames has always appealed to companies like Novelis that are looking to avoid hefty power and fuel costs to make metal from scratch. Others, including Louis Padnos's copper buyers, have turned to scrap when miners failed to meet demand, causing prices to rise for "virgin" metal.

Still, scrap sellers and metal industry analysts say the competition for supply has grown increasingly fierce this year, and the window for cost savings is closing. U.S. metal manufacturers are turning to recycled material as fuel costs skyrocket and China's booming economy sucks in more virgin metal. But buyers in China and other emerging markets are also buying more scrap, while generating relatively little recycled metal of their own. "There's a battle for this resource going on right now," said Eric Glover, an analyst with Canaccord Genuity.

 The price gap between scrap and virgin metal is narrowing. Shredded steel scrap costs $450 a ton in the U.S., up 33% from a year ago. Finished hot-rolled steel coil climbed 25%, to about $730 a ton. Scrap user Steel Dynamics Inc., which normally posts better profits than competitors that make steel from iron ore, last month said second quarter earnings would disappoint due to rising scrap prices.  .The gap between Comex copper prices and high grade copper scrap has narrowed to 31 cents a pound recently from 49 cents at the start of the year, according to Platts. July copper futures settled 0.5% lower at $4.3720 a pound on the Comex division of the New York Mercantile Exchange.

 Novelis is likely to run up against China and other Asian buyers as it relies more heavily on scrap. Consumers in developing countries have only recently become wealthy enough to buy cars and appliances, and aren't ready to send them to the scrap heap just yet. Almost 90% of the $12.5 billion in U.S. exports of scrap iron and steel, copper and aluminum went to Asia. Mr. Martens, the CEO, said the company will turn its auto industry customers into scrap suppliers.

With demand for both old and new metal surging, price relief is only likely to come to the scrap market later in the decade, when the first wave of Chinese consumers start replacing older goods. "The urban mine is the future of the copper industry," said Michael Jansen, head of metals research at J.P. Morgan Chase & Co. The same could be said for aluminum, steel and other in-demand metals, he later added.