The London Metal Exchange (LME) is involved in a healthy percentage of the world’s aluminum buying and selling, whether directly through its trading platform and warehouses or indirectly as a price setter.
Producers of recycled-content aluminum might have been encouraged by the progress the LME made in 2019 and 2020 in creating new contracts for low-carbon emissions aluminum and for aluminum scrap.
Details on the potential LME contracts are not final, but the low-carbon aluminum contract is intended to help producers meet sustainability goals and possibly avoid over-reliance on primary aluminum made in China, according to one Reuters report. That same report indicates that about half of the global primary aluminum supply “is produced in China, where power is mostly generated by coal-fired plants.”
Breaking up is hard to do
The contracts, should they prove popular, could help spur a “decoupling” of pricing for secondary alloys and the aluminum scrap that goes into them from that of virgin or primary aluminum. While such a decoupling is rare in the basic materials sector, the notion has backers, and some say they are already seeing decoupling occur in the plastics industry.
Demand for recycled-content, food-grade polyethylene terephthalate (rPET) to produce closed-loop beverage bottles means the food-grade rPET price has “experienced a solid decoupling with virgin for the past few years, contrary to most other resins, which still mostly follow the virgin [resin pricing] trend,” says Max Craipeau of Hong Kong-based Greencore Resources Ltd.
Craipeau says a collection of regulations in Europe—spurred by household consumer demands for greater sustainability—helped create the food-grade rPET market pressures that decoupled that material from virgin PET prices.
Aluminum scrap pricing relies on a series of discounts and premiums with spreads that can change, but scrap price reference points traditionally have been linked to primary aluminum prices.
If the new LME or other trading contracts were to sever that link and allow scrap and secondary alloys to trade on a decoupled market, at least one industry consultant sees this as a way to override an existing shortcoming in how metals are priced.
Barry Sweet of New Jersey-based B. Sweet & Co. says the basic supply and demand scenario that underpins commodity pricing considers pollution (including carbon dioxide emissions) a “free good” in economics, “and [thus] the true costs of production do not appear in accounting textbooks and is missing from the ‘language’ of business.”
The sustainability and circular economy movements, in this context, can be seen as a long-overdue reformulation of a model that has only priced in pollution in fits and starts, depending on the intermittent introduction of regulations.
Sweet says in the aluminum supply chain, buyers and sellers of finished aluminum and the raw materials that go into it historically have not had an incentive to factor in the pollution practices of the entities with which they are dealing. (In the “fits and starts” context, holding outside parties responsible in Superfund cases could count as one narrow and intermittent example.)
Producing aluminum from scrap can yield energy savings of as much as 95 percent, according to a 2007 study by a Danish university that was commissioned by U.K.-based Waste & Resources Action Programme. Sweet says some of these energy and cost savings are “embedded in the intrinsic value of the scrap and in the cost structures of the collectors, processors and secondary producers.”
He adds, however, “The negative values associated with the use of energy (pollution from large primary smelters, for example) is missing from the production side of the distribution chain, and conversely the positive value of less burning (lower emissions) also is missing from secondary recycling chains.”
A call for audience participation
Can an LME contract for low-carbon aluminum, or one for aluminum scrap, help overcome this difference? Sweet is skeptical, and both he and Craipeau point to a second factor that could need to be in place: requirements or incentives to use recycled materials.
On the plastics side, Craipeau calls Europe “a pioneer in such regulations, with a decree forcing PET bottlers to incorporate a minimum of 25 percent of rPET in their bottles by 2025 and 30 percent by 2030.”
Craipeau says this measure is welcomed by many EU residents. “This move, along with increasing [household] consumer pressure, has translated in practice with major bottlers in Europe already incorporating the 25 percent mandatory recycled content. Some bottlers already are incorporating up to 100 percent, as they realized there was a correlation between higher sales and higher recycled content,” Craipeau adds.
In the aluminum sector, recycled- content secondary alloys have long been part of the industry, but they have not traditionally relied on a “green” household purchasing angle or government mandate to find end markets.
“[The U.S. is] not that good at voluntarily complying for the greater good. [The LME’s ‘green’ contract] will work better in other parts of the world.” – Barry Sweet of B. Sweet & Co.
Norway-based Hydro is one producer that is branding recycled-content aluminum in Europe. The company’s President and CEO Hilde Merete Aasheim says, “We are positioning the company for the future [with an] aim to strengthen Hydro’s position as a leading sustainable industrial company, through our low-carbon aluminum, represented by Hydro Circal and Hydro Reduxa.”
In early 2020, Hydro referred to its recycled-content Circal aluminum as “currently one of Hydro’s fastest growing segments.” Reduxa is what Hydro calls primary aluminum it makes that it considers to be low carbon.
However, if the LME’s “green” contract is more expensive than a normal contract, Sweet says he does not think it will work in the U.S. He says, “We are not that good at voluntarily complying for the greater good. It will work better in other parts of the world.”
Sweet points to a “softer self-interest model like Northern Europe” (the home of Hydro) as such a place. In free markets everywhere, he adds, “There is natural tension between sustainability and unfettered capitalism, but they are not entirely mutually exclusive.”
Indeed, U.S.-based Alcoa, like Hydro, has introduced branded low-carbon and recycled-content aluminum products, in part to appeal to architects and contractors trying to earn LEED (Leadership in Energy and Environmental Design) green building points.
The company’s Ecodura aluminum billets are “made with a minimum of 50-percent-recycled content, lowering energy usage by 95 percent,” Alcoa says, perhaps referencing the oft-cited Danish study. Alcoa’s Ecolum primary aluminum is produced at “predominantly hydro-powered smelters” that generate fewer CO2 emissions, according to the company.
An uncertain path forward
With customers from around the world involved in all aspects of the supply chain, the LME always claims to welcome feedback on emerging contracts, and it received some in late 2020.
An early November article in the U.K.-based Financial Times includes comments from two industry executives who express reservations about the effectiveness of the proposed contract.
The managing director of India-based Hindalco Industries expresses concern the contract will play favorites by benefiting “a few companies.”
In the same article, Aasheim of Norsk Hydro—a firm that might seem poised to benefit from the new contract—also expresses reservations. The Financial Times quotes her as saying, “We are a little bit afraid [the LME contract] will commoditize a [specialized] product. There are a number of green products out there—you have to be precise about what is your [carbon] content; it’s not one standard calculation.”
The two executives are not necessarily coming from identical points of view, but each offers a variation on the topic of how “green” can be defined.
LME Chief Executive Matthew Chamberlain, perhaps in acknowledgement of this intractably gray area, responded to the two quotes by telling the Financial Times, “We welcome all views in respect of our proposed sustainability strategy and are considering the feedback we’ve received as part of the discussion paper process.”
Sweet says the way forward is not easily determined and, on the secondary production side, may not always be what scrap recyclers or secondary producers would endorse.
While the “missing pollution values” could most often assist primary producers, Sweet says their absence is “not so apparent in many metal recycling sectors because there is generally high enough scrap commodity value to allow each of the steps in the recycling chain to add enough value to their processes and keep the material flow moving.”
He continues, “But when the values of the recyclable materials are very low, or commodity prices suddenly drop, or cheap substitute materials become available or loss of end markets appear, it will create friction to the flow of recyclable materials to the mills, and this slowing or stopping tends to highlight the ‘missing values’ that have not been considered.”
When it comes to aluminum, plastic or any other commodity, Sweet frames the question in a broader construct. He says, “My electric energy service provider offers a clean energy alternative to normal electrical service for an additional fee. My question is: Why is the choice that is less socially beneficial cheaper?”