CRU: Aluminum Borrows from Steel: Backward Integration in Recycling

The logic behind both transactions was driven by the desire to control sourcing of their steel inputs, as both companies were major steel scrap processors. At the same time, the firms also acquired formidable non-ferrous sourcing and trading capacity. Both David J. Joseph and Omnisource remain major forces in aluminum, copper and stainless scraps today.

Now, aluminum semi-fabricators are potentially looking to borrow a page from the steel industry.

Aluminum Backward Integration Has Been Done in the Past But Abandoned

The aluminum industry is not without its examples of backward integration. Most notably, the big primary aluminum producers once controlled large grassroots used beverage container (UBC) recycling networks. Both Alcoa and Reynolds operated retail collection systems for UBC. Alcoa exited the market in the 1990s and Reynolds sold its Reynolds Aluminum Recycling group (RARCO) to Wise metals in 1998.

Major beverage companies have also been active in UBC. Anheuser-Busch ran what was arguably the largest UBC recycling business for many years. After acquisition by INBEV in 2008, the recycling business was not considered a core business and it was dismantled.

Coca-Cola also made a concerted pushed into aluminum recycling for a brief period from 2007-2014, before also deciding to pursue other approaches to raising UBC recycling rates.

Finally, Alcoa and Novelis briefly (2010-2012) formed a joint venture company, Evermore, to acquire UBC. The operation was successful, but Novelis elected to go another route on sourcing UBC with a strategic alliance with one of its customers.

Investment in Recycling Capacity Makes It Timely to Consider Backward Integration Again

Today, the aluminum rolling mills and extrusion industry are sinking new capital into recycling at a quickened pace. Scrap is being recognized as the ultimate low-carbon metal, with its huge, avoided energy footprint vis-à-vis virgin feedstocks. A demand for higher recycled content in packaging, construction and other durable goods is also driving investment.

Novelis announced a $365 million project in Guthrie, Ky., to produce 240,000 tons/year of slab from scrap. Western Extruders in Texas just inaugurated a new 75,000 ton/year billet plant. Hydro is building a new 120,000 ton/year billet plant in Michigan. All these new plants will be driven by scrap. However, the approach to sourcing the scrap also requires a new approach.

The aluminum industry has done a good job in building concentrated closed-loop recycling in some key products. One, most pre-consumer aluminum beverage can scrap is returned directly to the big mills like Novelis, Arconic, Constellium and Kaiser. Second, the pre-consumer automotive body sheet (ABS) scrap is heading back to the mills for conversion back into new ABS.

By and large, virtually all new, pre-consumer aluminum scrap is being recaptured. What’s not going back through closed loop is being collected and processed by independent scrap dealers such as Omnisource and David J. Joseph. Make no mistake, they do an incredible job of managing this very diverse and complicated supply chain. However, that comes at a price.

The biggest complaint we hear about scrap sourcing is the inability to get long-term contracts, and pricing is hard to forecast. Another growing demand among buyers is the desire to use more post-consumer scrap, which pushes buyers far out of their comfort zone on quality due to the variability of the grades that come with a post-consumer product.

Traceability and Expansion of Closed-Loop Recycling Argue for Backward Integration

The concerns of the aluminum mills are probably familiar to the steel mills. This is what drove Nucor and SDI to take more control of their supply chain by purchasing two of their major suppliers.

We believe the aluminum mills are poised now to do the same thing. It would not surprise us to see a major mill like Novelis or Hydro make a targeted acquisition of a major U.S. scrap recycler in the next year.

This would ease concerns about surety of supply from both a quality and a price perspective.

Over time, aluminum mills will need to provide more transparency in the composition of their inputs, especially on the scrap side. Is it post-consumer or pre-consumer? If it is pre-consumer, can we determine the amount of primary metal that went into the substrate that generated the scrap? Tough questions to answer, but backward integration would help to trace those scraps to the point of generation and work with industrial suppliers.

Backward integration would also facilitate expanding closed-loop recycling beyond the highly concentrated can and auto markets.

A seamless scrap-to-mill system would also streamline the process of sorting, grading and delivering post-consumer material into “furnace ready” packages for the casthouse. Variations in quality would be managed at the collection point, NOT at the casthouse, where the emphasis is on throughput, not pre-processing.

Are Scrap Dealers Willing to “Dance”?

The scrap industry is a case study in grassroots entrepreneurship. There are many multi-generational family-held businesses with great histories. However, not every generation wants to carry it on. It’s a tough business, requiring a lot of passion, time and energy to do it well. The capital requirements to remain relevant are growing, especially just to stay compliant on OSHA and EPA standards. Many extremely well-run family enterprises may be receptive to being bought by corporations with the resources to further grow the business.

Don’t be surprised to see some major transactions during 2022 that marry grassroots scrap-savvy companies with big downstream aluminum companies.

Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at gregory.wittbecker@crugroup.com

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