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Printed on paper that contains at least 50 percent recycled fiber.
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Markets for Recycled Aluminum
United States Environmental Protection Agency
Office of Solid Waste
Office of Policy, Planning and Evaluation
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Table of Contents
I. Summary
II. Market Overview
Which Markets Are Included?
Who Participates in These Markets?
How Large Is the Market for Recycled Aluminum?
Trends In Scrap Consumption
HI. Factors Influencing Aluminum Scrap Markets
Supply of Scrap Aluminum
Demand for Scrap Aluminum
1
3
IV. Government Intervention in Aluminum Scrap Markets
Government Intervention in Markets
Summary of Current Involvement
Effects of Possible Federal Initiatives to Increase Aluminum Recycling
Conclusions
References
17
26
29
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I. Summary
Recycling is experiencing a rebirth as an important method for dealing with growing
volumes of solid waste. The time of abundant, inexpensive landfills is coming to an end as
capacity is constrained by shutdowns at existing operations, increased costs of compliance
with pending regulations from states and the federal government, and difficulty siting new
operations. The attraction of recycling is its recognition of the intrinsic value of much of the
material that is thrown away. However, the economics of recovering these materials has
made recycling viable for only a limited number of materials.
The viability of recycling for a given material depends on economics: used materials
that can be collected, processed, and reused at a lower cost than substitutes can be produced
will be in demand by manufacturers. Markets for recycled materials have developed over
time to facilitate the consolidation of material into quantities that are "worth" handling.
These markets are the key to continued and expanded recycling opportunities because they
provide an alternative to landfills for a number of materials.
With the renewed interest in recycling, an important issue to consider is the operation
of these existing markets and how they would react to policies developed to increase
recycling in the United States. This study describes the operation of the markets for scrap
aluminum as an example of:
• how recycling markets are structured,
• what factors influence the supply of and demand for materials,
• what projections can be made about recycling markets, and
• how government policies to increase recycling may affect these markets.
The aluminum industry was chosen because the markets for scrap are established and
(comparatively) well understood. Recycling used aluminum beverage cans (UBCs) is often
cited as a "success story" in the management of municipal solid waste, with current recycling
rates of about 60 percent.1 Aluminum has been recovered since the early 1900s, and today
includes recovery from both municipal sources (mostly aluminum cans) and other sources
(scrap from production and from reuse of old aluminum products).
1 The Aluminum Association, Inc., Aluminum Statistical Review for 1989, p. 30.
1
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Before governments proceed very far with initiatives to promote recycling, it is
important that they understand the operations of the private sector in handling these
materials. Otherwise, policies that appear to expand recycling opportunities may replace
private ventures with government operations. Another argument for this type of study is to
understand the influences on the scrap markets so that incentives designed to encourage
recycling are targeted appropriately.
The aluminum industry is comprised of producers of primary and secondary ingot,
mill products (such as sheet and plate), and castings. Because the aluminum industry
produces many different types of products, aluminum scrap comes in many different forms,
and this scrap has a variety of uses in the industry. This study covers the scrap market as a
whole.
Although it comprises only a small fraction of municipal solid waste, aluminum is one
of the most profitable materials to recycle and has achieved high recycling rates. Virtually
all aluminum scrap generated in manufacturing operations (new scrap) is recycled, and a
significant fraction of aluminum discarded by households or businesses (old scrap) is also
recycled.
For individual households, the most commonly recycled aluminum product is used
beverage cans, which account for about 60 percent of the old scrap recovered. Many other
aluminum materials are recycled, including aluminum siding, automobile parts, and foil.
Because of the range of products in aluminum recycling, many firms, communities, and non-
profit organizations are all part of the aluminum recycling market and collect scrap for sale
to intermediaries and ultimately to industries that reuse the material to make new products.
In some cases, the same firms that manufacture primary aluminum also purchase recovered
aluminum (manufacturers of can sheet, for example). For other types of aluminum, separate
industrial processes are required to reuse the aluminum in final products.
In 1989, about 28 percent of the total aluminum supply in the United States came
from recovered aluminum. Additional aluminum could be recovered from municipal and
other waste streams. However, the metal is often mixed with other materials, complicating
identification and separation of the aluminum. Higher scrap prices might make additional
separation profitable for scrap dealers.
Many manufacturers demand recovered aluminum as an input to production or
demand products that contain recycled aluminum. In some applications, products made from
recycled aluminum are used exclusively, while in others recovered aluminum may be a
perfect substitute for aluminum made from virgin materials. Because demand for scrap
aluminum is strong both domestically and abroad, the principal limitation to increased
recycling is on the supply side of the market - if the material could be supplied at a
reasonable price (i.e., a price competitive with that of virgin aluminum), firms would
purchase more scrap.
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n. Market Overview
The principal distinction in aluminum scrap markets is between new and old scrap.1
New scrap is generated at plants making end products from aluminum. It includes clippings,
borings, and surplus products such as the skeleton left after cans are cut from sheet. Old
scrap is retrieved from post-consumer uses of aluminum, including beverage cans,
automobiles, and old cables. In this report we are concerned primarily with old scrap.
Which Markets Are Included?
Depending on where they live and their particular inclination, individuals who want to
collect aluminum beverage cans for recycling may give them to nonprofit operations (e.g.,
churches or civic groups), sell them to redemption centers, have them collected at curbside
(e.g., through municipal collection programs), or return them for deposits. The motives for
collecting cans differ. For example, the collector may wish to raise money for charity, to
generate profit, to divert material from landfills or municipal waste combustors, or to simply
cash in on a deposit. This study covers the aluminum recycling market from collection
through processing and eventual reuse of the aluminum.
Who Participates in These Markets?
Collectors and Scrap Dealers
Collectors consolidate flows of new scrap aluminum from many different sources and
channel the scrap into specific categories for reuse.2 Collectors may be dedicated to
aluminum, as in the case of industry-sponsored buy-back operations for cans, or may be
larger-volume scrap dealers who also handle other materials, such as other metals and paper.
Scrap dealers handle virtually all of the non-UBC post-consumer scrap. They buy old
scrap such as old aluminum castings, wire, aluminum siding, and scrap from automobile
shredders, and new scrap such as clippings from the fabrication of aluminum products.
1 Aluminum scrap generated by foundries or mill product producers is classified as "home
scrap" or "run-around" scrap. This scrap never enters scrap markets, since it is reused in-house.
Thus, it is not included in any of the recovery data cited in this report.
2 New scrap may also flow through collectors, but the current trend is toward direct
purchase by manufacturers of mill products. Personal communication with Robert Garino,
Director of Commodities, Institute of Scrap Recycling Industries, September 4, 1988.
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Dealers process and sort scrap, depending on the customers' demands and on the facilities
they have available. As with all nonferrous metals, sorters are needed to hand-pick through
material to spot particular alloys. Dealers may also invest in equipment to separate, shred,
or bale aluminum. Some dealers have installed sweat furnaces, which separate other metals
from the aluminum and reduce the aluminum scrap to ingots for shipping. This ingot is not
produced to any particular specification, however, so it does not command a very high price.
The Aluminum Recycling Association estimates that in 1988 about 1,200 dealers handled
scrap aluminum.3
Collectors of UBC are more numerous than scrap dealers, since they serve the broad
generator segment of can users rather than the more concentrated industrial generators of
aluminum scrap. UBC operations include municipal programs, which separate cans from the
waste stream, industry-sponsored drop-off or buy-back centers, bottlers and distributors in
states with mandatory deposits, and nonprofit collection programs. With the exception of
large-volume industry operations and large bottler operations in deposit states, these are
small, labor-intensive operations. Even the largest of these are likely to have only minimal
capital requirements for equipment, such as can flatteners or balers. Vendor quotes for can
flatteners/blower systems begin at $10,000, for example, and balers for cans are available for
as little as $4,000.4
Scrap Consumers
The demand for the individual products made from aluminum affects the demand for
scrap. If the automobile industry is strong, there will be a strong demand for aluminum
castings from foundries. If construction is doing well, demand for building materials and
siding from primary producers will be strong as well. The amount of scrap demanded is
ultimately dependent on demand for all products made from aluminum (as well as on other
factors, such as the price of primary aluminum).
Scrap consumers purchase and reuse the aluminum scrap. We have categorized the
major scrap consumers as secondary smelters, producers of mill products, and producers of
castings (foundries). The major relationships between these and the other market participants
is shown in Figure II-1.
3 Personal, communication with Richard Cooperman, Executive Director, Aluminum
Recycling Association, September 2, 1988.
4 Personal communication with Mark Cerniglia, American International Company,
September 21, 1990.
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Figure 11-1
Flow of Aluminum Scrap
Primary
Aluminum Ingot
Secondary
Smelters
Producers of
Mill Products
I
Producers of
Castings
(foundries)
Consumers of mill products
and castings
(manufacturers of end products)
End products
New scrap
Old Scrap
Flow of Aluminum Scrap
Scrap
suictp ? — ^^- UDVS ^uimwiuib
..........i
»- Plnu/ nf Aluminum Prr\r4n^fo
•:
1
'
ExDOrts
Dealers |
-:-x-:-:-:-:-:->:-:-:-x-:
1---
t
1 Imnnrtc
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Scrap Consumers: Secondary Smelters
Secondary smelters convert scrap into specification aluminum ingot for resale.5
These operations process aluminum to remove contaminants, melt the aluminum, and
produce alloys to meet customers' specifications by adding alloying elements such as silicon,
zinc, copper, manganese, and nickel. The aluminum is then tested to ensure that it meets
specification and is shipped as ingot to an end user.
Secondary smelters buy the vast majority of non-UBC post-consumer scrap. They
typically buy scrap by specification as well. The industry has established standards for
shipments and lists 34 distinct specifications for scrap, including new pure aluminum
clippings, aluminum airplane castings, painted siding, and automobile shredder scrap. This
scrap may come from scrap dealers (usually old scrap) or- directly from producers of finished
aluminum products, such as automobile parts manufacturers (new scrap).
Secondary smelters are concentrated where aluminum scrap is readily available.
Many are located in the Northeast and North Central regions of the country and in Southern
California. Currently, 39 companies operate 48 plants in the United States. They may draw
in scrap from as far away as 500 miles.6
Scrap Consumers: Producers of Mill Products
Many mill product producers are integrated into the major primary production
companies. The primary producers smelt aluminum metal from alumina. These firms (e.g.,
Aluminum Company of America (ALCOA), Reynolds Metals Company, Alumax, Alcan
Aluminum Corporation, and Kaiser Aluminum and Chemical Company) are the most familiar
to the general public. These integrated producers are increasing their purchase of UBC scrap
for their own use in producing can sheet.
Scrap Consumers: Foundries
Foundries that produce castings for automobiles, motors, and hardware comprise the
other major group of scrap consumers. The metal that they pour into their molds must meet
specifications set by the foundries' customers. Foundries often use ingot from secondary
5 Specification ingot meets predetermined standards for its content of aluminum and other
alloying ingredients; setting specifications such as these provides a method of assuring quality
in the production of .finished goods.
6 Personal communication with Richard Cooperman, Executive Director, Aluminum
Recycling Association, September 2, 1988.
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smelters exclusively, because of their need for specific alloys that are manufactured only by
the secondary smelters. Foundries do not directly purchase a large share of aluminum scrap,
although some do buy scrap directly and add it to their castings. Their primary role in the
aluminum scrap market is as the major consumer of specification aluminum ingot from the
secondary smelters.
Other Scrap Consumers
Less significant scrap consumers include fabricators of finished mill products (e.g.,
independent can manufacturers) and the chemical industry. These two groups are specifically
identified in U.S. Bureau of Mines data presented later in this chapter, although they account
for a very small share of total scrap aluminum consumption.
How Large Is the Market for Recycled Aluminum?
The total supply of aluminum in the United States is defined as domestic primary
production (aluminum produced from alumina) plus imports plus scrap. Scrap is measured in
terms of its recovery and its recycling. Recovered aluminum includes the weight of new and
old scrap purchased by end-users. Recycled aluminum is recovered aluminum consumed to
make new products.7
The principal source for estimates of recycled aluminum used in this report is the
U.S. Bureau of Mines' Minerals Yearbook. 8 The Aluminum Association also compiles
7 In many cases the terms recovered aluminum and recycled aluminum are used
interchangeably to describe aluminum metal reutilized to make new products. Secondary
recovery and secondary aluminum are terms also used by some sources to describe recycled
aluminum. To avoid confusion, this report will use common solid waste management
terminology where the term "recovery" means materials removed from the solid waste stream
for the purpose of recycling; and the term "recycling" refers to the material actually reutilized
to make new products.
8 The U.S. Bureau of Mines uses different terms for scrap recovery and scrap recycling than
used in this report. The Bureau defines scrap consumption to be the weight of old and new
scrap purchased by end-users (scrap recovery), and scrap recovery as the metal utilized to make
new products (scrap recycling). Scrap consumption is estimated annually by the Bureau of
Mines and includes the weight of new and old purchased scrap. The Bureau of Mines produces
annual statistics on scrap consumption by industry category. In addition to the consumption
estimates, the Bureau also reports recovery, i.e., the metal actually recovered in a given year
from the scrap purchased.
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Bureau of Mines and other data in its annual statistical review. The Aluminum Recycling
Association, which represents secondary smelters, has estimates for its own recycling, but
not for that of any other sector.
Growth in the Aluminum Recovery Market
Aluminum recycling has increased steadily since 1970, with recycled aluminum
becoming a much more important source of supply over the period. The quantity of
aluminum recycled in 1989 was slightly more than 2.0 million metric tons, which is more
than twice that recycled in 1970. Figure II-2 illustrates the stable growth of aluminum
recycling relative to the more variable fluctuations in primary production.
The rate of growth does not tell the entire story of recycled aluminum's increased
importance in total production, however. Figure II-3 shows the recycling rate (i.e., the
amount of recycled aluminum expressed as a percentage of total aluminum supply) climbing
from 18.9 percent in 1970 to 27.5 percent in 1989. Increased UBC recycling has fueled this
increase in overall recycling. The Aluminum Association and the Can Manufacturers
Institute have reported that the UBC recycling rate rose from 26.4 percent in 1977 to 60.8
percent in 1989. Compared with other products in the municipal solid waste stream, this is a
very high recycling rate. The pattern of sharp increases after 1980 reflects the recent
importance of UBC as a feedstock for can sheet production.
New scrap, which is included in the recycling estimates, is virtually 100 percent
recycled.9 The inherent value of this scrap ensures that waste is returned to the mill or
foundry for reuse.
The third category of scrap included in the recycling estimates is non-UBC old scrap.
As measured in this report, recycling rates of this old scrap are difficult to interpret. Many
products from which this scrap is derived are durable goods with relatively long service
lives. Therefore, recycling in any given year may include aluminum sold many years before.
This distinction is important to keep in mind when citing recycling rates for the aluminum
industry as a whole.
Throughout the 1970-1989 period, domestic primary production has declined as a
share of total aluminum supply (see Figure II-4); domestic primary production in absolute
terms rose during the period from 1970 (3.6 million metric tons) to 1980 (4.7 million metric
tons), but then declined to 4.0 million metric tons in 1989. Imports increased from 8 percent
to 25 percent of total supply during the same period, representing a tripling of total tons
9 Aluminum Recycling Casebook, Aluminum Association, December 1985, p. 14.
8
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Figure 11-2
U.S. Aluminum Production
U.S.
8000
Production
(thousands
of tons) 7200
6400
1600
800
1970 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89
Year
Primary Production
Secondary Recovery
Source: Aluminum Association, Aluminum Statistical Review for 1989, p. 23.
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Percentage of
Aluminum
Supply from
Recycled
Aluminum
10
Figure II-3
Aluminum Recycling Rates
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
Year
Source: Aluminum Association, Aluminum Statistical Review for 1989, p. 23.
10
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Figure 11-4
Changing Market Shares in the Aluminum Industry
Share of
U.S. Supply
(percentage)
100
90
80
70
60
50
40
30
20
10
197071 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89
Year
Primary Production
Imports
Secondary Recovery
Source: Aluminum Association, Aluminum Statistical Review for 1989, p. 23.
11
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imported. The largest component of the growth in recycled aluminum's share of supply is
the increased use of UBC as an input in can sheet production.
Trends In Scrap Consumption
Total purchases of scrap are somewhat larger than the amount recycled (Figure II-5).
This is because of changes in inventory and losses in handling and processing. As a result of
inventory changes, scrap recovery (purchase of scrap) is not perfectly correlated with scrap
recycling; when scrap recovery rises well above scrap recycling, it may indicate increases in
inventories either in anticipation of price increases or because of slackening demand.
Secondary smelters are the largest consumers of non-UBC post-consumer scrap, but
they were once the dominant consumers of all aluminum scrap. Until the 1970s, secondary
smelters consumed 90 percent or more of the aluminum scrap recycled.10 While their
absolute level of consumption has increased since the early 1970s, their share of scrap
recovery has fallen. The secondary smelting industry has been struggling financially as its
customers, such as the automobile industry, have lost market share to foreign producers."
The big new buyers of scrap, in both absolute and percentage terms, are the
producers of mill products who use UBC as feedstock for can sheet. Most of these firms are
classified in the Bureau of Mines recovery data as primary producers, since they also
produce aluminum from primary materials. Independent can producers would be classified
as fabricators in the consumption data below. Figure II-6 shows the Bureau of Mines data
on the composition of scrap recovery each year since 1972. Firms classified as primary
producers (which are integrated firms that produce mill products as well as primary metal)
purchased 1,025,107 tons in 1988, up from 205,000 tons in 1972. This represents an
increase in their share of scrap recovery from 17.8 percent to 45.9 percent over 16 years.
Purchases of scrap by foundries and chemical producers are much less significant, accounting
for a combined share of 4.8 percent of consumption in 1988.
Higher energy costs during this period have driven producers of primary aluminum
and aluminum products to cut costs. One way to reduce costs is to use more scrap:
Remelting aluminum scrap to produce new aluminum products saves about 95 percent of the
10 Personal communication, Richard Cooperman, Executive Director, Aluminum Recycling
Association, September 2, 1988.
11 "Aluminum Recycling: More Than Just Aluminum Beverage Cans," Phoenix Quarterly,
Winter 1987-88, Institute of Scrap Recycling Industries, Washington, D.C.
12
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Figure 11-5
Scrap Aluminum Recovery Versus Recycling
U.S.
Consumption
(thousands
of tons)
2700
1972 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89
Year
Loss and Change in
Inventories
Recycling
Source: U.S. Bureau of Mines, Aluminum Mineral Yearbook, 1988.
13
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Figure 11-6
Aluminum Scrap Recovery by Type of Firm
U.S. 270°
Recovery
(thousands
of tons) 2400
2100
1800
1500
1200
900
600
300
. 1972 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88
Year
Chemical Producers
Foundries
Fabricators
Primary Producers
Secondary Smelters
Source: U.S. Bureau of Mines, Aluminum Mineral Yearbook, 1988.
14
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energy required to convert bauxite into virgin aluminum. In addition, each ton of remelted
aluminum used replaces four tons of bauxite.12
One other important category of scrap use is exports. The United States has been a
net exporter of aluminum scrap for over 10 years, as shown in Figure II-7. More than half
of those exports go to Japan, where energy costs are so high that Japan has very little
primary smelting capacity. The scrap is remelted abroad and made into semifabricated or
fabricated aluminum products, some of which are shipped back to the United States for sale.
In 1989, despite primary aluminum exports of 1,200,000 tons and scrap exports of 646,000
tons (about 27 percent of domestic consumption of scrap), the United States imported
1,491,000 tons of primary aluminum, as well as 245,000 tons of scrap. About 75 percent of
the imported scrap comes from Canada.
12 Cynthia Pollock, Mining Urban Wastes: The Potential for Recycling, Worldwatch Paper
76, Worldwatch Institute, April 1987.
15
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Figure 11-7
U.S. Scrap Trade Balance
Net Exports 45°
(thousands
of tons)
400
350
300
250
200
150
100
50
1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
Year
Source: Aluminum Association, Aluminum Statistical Review for 1989, pp. 36-37.
16
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. Factors Influencing Aluminum Scrap Markets
Several conditions affect aluminum markets. Some affect the supply of recovered
aluminum, others affect demand for recovered aluminum, and still others affect both.
Supply of Scrap Aluminum
Assuming no government intervention, the supply side of a market reflects the costs
of producing a given output. For scrap markets, the supply function is the relationship
between the price of scrap and the quantity that a supplier is willing to provide at the price.
As with most markets, a certain quantity of scrap aluminum is available at relatively low
cost, especially for plants that use in-house scrap. Supply of new scrap would probably not
be very sensitive to price because so much new scrap is recycled already - it is so valuable
that producers simply do not want to waste it, and it is available at near-zero cost. For old
scrap, however, we would expect a supply response to changing prices.13 If the price of
scrap is high enough, suppliers will go to great lengths to obtain scrap. In 1987 and 1988,
the prices paid for scrap aluminum were so high that in some areas, such as California,
guardrails and lampposts vanished from roadsides and appeared at material reclamation
centers.
Factors Affecting Supply
1. The Cost of Acquiring Scrap Accounts for the Majority of Collectors' and
Processors' Costs
The cost of aluminum scrap is the largest cost component incurred by the scrap
suppliers (collectors and processors) in the markets described in Chapter II. None of the
suppliers, including the most capital-intensive processors of scrap, spends more on
processing than on obtaining the raw material itself. This is what makes aluminum such a
"recyclable" product: Aluminum is easy to reuse without a great deal of expensive
processing.
Some scrap dealers and most can recycling centers have very low capital costs; the
type of equipment necessary for their operations is not expensive. A small baler may cost
less than $10,000, so the barriers to entry are not high for these operations. Hand-sorting
13 This price sensitivity was noted by Richard Gordon et al., in The Collection of
Nonferrous Scrap: A Literature Review of the Copper and Aluminum Sectors, Pennsylvania State
University, July 1972.
17
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mixed scrap is expensive, so another important cost component for dealers is labor.
However, in the case of single-material operations such, as container buy-back centers, even
the labor costs are very low.
Secondary smelters are the most capital-intensive processors of scrap, given the cost
of their furnaces and necessary metallurgical testing equipment. Nevertheless, the cost of
scrap accounts for about 85 percent of the cost of their product (specification ingot).14
Changes in the costs of other inputs to production, such as capital costs, will be less
important to the smelters than changes in the cost of scrap.
Many suppliers of UBC operate in a much different situation. Municipal and
nonprofit operations such as curbside programs, voluntary recycling programs, and drop-off
centers do not actually pay for scrap; their major costs are for handling the scrap and
marketing it. They are much more a part of the collection side of the market than the
processing side, and they operate on the payment they receive from scrap consumers or
brokers who buy from them.
A final group of UBC suppliers are those operating in states with deposits or
redemption values for containers. These businesses do not actually purchase containers from
consumers, but they must bear the full cost of collecting the material (e.g., additional
vehicles, labor, and storage facilities). Even if these operations do process the material
(e.g., bale cans to compact the material), the cost of .this activity is comparatively low and,
in some cases, the firm purchasing the UBC may provide the equipment to compact the
UBC.
2. Government Policies Have Altered the Supply of Aluminum Beverage
Containers
Ten states containing 29 percent of the U.S. population have programs that assign a
value to aluminum beverage containers independent of scrap value. (Nine states with 18
percent of the population use deposits. The tenth, California, has a minimum redemption
value of $0.025.) These programs have a major effect on the market for UBC because they
artificially raise the value of containers, resulting in a higher quantity collected than if scrap
values were the only incentive.15 In general, as long as deposit values remain higher than
14 Personal communication with Richard Cooperman, Executive Director, Aluminum
Recycling Association, September 2, 1988.
15 The fraction of soft drink containers in these 10 states returned for their deposit or
redemption value ranges from roughly 60 percent to 90 percent. See, for example, Soft Drink
Bottler Costs Under the Massachusetts Bottle Bill, Temple, Barker & Sloane, Inc., April 1988;
Tlie Economic Effects of New York State's Returnable Beverage Container Law, National
Economic Research Associates, January 1989; and Michigan Soft Drink Bottlers' Costs Resulting
18
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scrap values, deposit programs will increase the amount of UBC supplied. At deposits of
$0.05 per container, the deposit is much higher than the value at current prices of
approximately $0.53 per pound for UBC16 (about $0.02 per container). Even at the
historically high prices of 1988 and 1989 (as high as $0.80 per pound or nearly $0.03 per
container), deposits were above scrap prices.
These programs do not directly affect the value of UBC once it leaves collectors
because the deposits flow between consumers, retailers, and bottlers and distributors. The
effect of these programs is, however, to push more UBC into the market than would be there
given current scrap prices. All else being equal, one would also expect deposit programs to
cause a decline in UBC prices, since more UBC is supplied than "called for" by the market
scrap price.
3. The Price Responsiveness of Scrap Supply Is Uncertain
New scrap is already recycled to a much greater extent than is old scrap. Because of
the value of new scrap and the high recycling rate, it is expected that new scrap supply
would be relatively unresponsive to price.17
Some research, such as a report prepared in 1979 by the Research Triangle Institute
for EPA, suggests that changes in the price of aluminum scrap have no effect on the quantity
of UBC supplied. RTI cites two primary reasons for this lack of response: consumers' "do
good" motivations to recycle, and the fact that the decision by a household to recycle is an
all-or-nothing decision. If the price of aluminum scrap increases enough to induce a
household to recycle its aluminum cans, it generally recycles all of them. Further price
increases have no effect on the quantity of UBC supplied, since the household is already
supplying 100 percent of its UBC.18 Other factors, such as deposit laws and location of
collection centers, also act to decrease the price responsiveness of consumer scrap supply.
Deposit programs create a value for containers that is much higher than their scrap
value (i.e., an artificial supply-price is set greater than the market price for scrap).
Consumers return containers to regain the deposit value rather than the scrap value.
Consequently, fluctuations in the market price of scrap are unlikely to affect the supply of
UBC. Therefore, in states with deposit laws, we would not expect UBC supply to be
responsive to scrap price changes.
from the Deposit Law, Temple, Barker & Sloane, Inc., April 1989.
16 Resource Recycling, Bottle/Can Recycling Update, August 1990.
17 See footnote 13 referring to the Gordon analysis.
18 Research Triangle Institute, The Supply of Secondary Aluminum Cans, April, 1979.
19
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The large number of collection centers for UBC may also minimize supply response
to price changes. Given convenient opportunities to recycle cans, consumers may simply get
into the recycling habit (e.g., stop on the way to the store). Changes in prices paid may
have little effect on the UBC supplied in those cases.
Empirical evidence, however, suggests that the supply of old scrap, including UBC,
may be responsive to price, especially in non-deposit states. The use of price by scrap
dealers as a mechanism to control supply is evidence that at least marginal suppliers are
influenced by price. In any case, price is only one of numerous factors influencing the
supply of old scrap. Supply of non-UBC old scrap is probably the most responsive type of
aluminum scrap to scrap price changes. Higher scrap prices will increase the collection
activity of dealers, will make longer hauls more worthwhile, and will justify higher expense
for separation. Lower prices will push marginal dealers out of the business or at least cause
them to shift to other materials.19
Trends in the Supply of Scrap Aluminum
The major change in the supply of scrap aluminum in the next several years will be
the continued growth in scrap tonnage supplied by UBC scrap. The level of competition in
the packaging industry and the political pressures for recyclable packaging indicate that the
big changes shown in Figure II-6 (driven by can sheet producers buying more UBC) will
continue.
Municipal waste concerns are driving communities to go beyond deposit laws to much
broader recovery strategies, such as mandatory and voluntary curbside collection programs.
The rate of new legislative initiatives in this area is increasing, so communities will become
more important suppliers of aluminum, providing a relatively inexpensive source of the metal
to scrap dealers and producers.
With the change in focus from industrial to residential recycling, the role of scrap
dealers in the market has changed somewhat, with cleaner industrial and UBC scrap more
likely to bypass dealers and flow directly to can sheet producers. The expansion of
community recycling programs over wide areas, however, may tax the ability of can sheet
producers to consolidate that material and bring it to their plants. This is a role that might
be filled by scrap dealers, who are more geographically dispersed.
19 See footnote 13 referring to the Gordon analysis.
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Demand for Scrap Aluminum
The demand side of a market reflects the potential quantities of the product that
consumers are willing to buy. For scrap markets, the demand function expresses the
relationship between a given price of scrap and the quantity that consumers of scrap will
purchase at that price. The scrap aluminum market is typical in that some consumers are
willing to buy some scrap at a relatively high price; however, if scrap suppliers wish to
increase sales, the price must drop to increase quantity demanded.
Factors Affecting Demand
1. Scrap Demand Depends on Demand for Finished Products
Aluminum scrap of all types is a product input. Furthermore, although scrap is used
in several different markets, suppliers can market some types of scrap to only one type of
consumer. This further binds the fortunes of those scrap markets to the final product
producers who buy that type of scrap. ,
As with other input markets, the tie between demand in the aluminum processing and
consuming industries and demand in the aluminum scrap market results in volatile aluminum
scrap prices (see Figure III-l). A slump in scrap demand, caused by a fall-off of demand in
the scrap-using industries, manifests itself more in falling prices than in slow sales. For
example, during the 1981-82 recession, the automotive industry was hit particularly hard; as
a result, demand for aluminum castings dropped. In the scrap market, consumption of scrap
by secondary smelters and foundries did drop (see Figure II-6), but most of the impact was
seen in price. Real scrap prices declined by more than 50 percent between their high point
of 1980 and their low of 1982.
2. Scrap Aluminum Demand Depends on the Price of Primary Aluminum
Recycled aluminum is often a nearly perfect substitute for the primary product, so
scrap demand should move in the same direction as primary prices. If recycled aluminum
competes directly with primary aluminum, a higher price for the primary metal should boost
scrap demand. In can manufacturing, for example, we would expect that a jump in primary
aluminum prices (brought on by an energy price shock, for example) would strengthen the
incentive for mills to purchase UBC.
3. No Significant Stigma Is Attached to Aluminum Made from Scrap
Both aluminum scrap and secondary ingot produced by smelters are classified by
specifications. The importance of the specifications is that they help scrap consumers know
the properties of the input they are buying.
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Figure 111-1
Aluminum Scrap Price Index
Index 225
(1982-100)
200
175
150
125
100
25
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990
Year
Price of Scrap
Real GNP
Source: U.S. Bureau of Labor Statistics; U. S. Department of Commerce.
U.S. Department of Commerce, Survey of Current Business, January 1990.
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Scrap consumers buy only certain types of scrap, depending on the production
processes for their products. For instance, can sheet manufacturers buy UBC because they
know the composition of that type of scrap and can use the scrap in making new can sheet.
On the other hand, secondary smelters will take a wide variety of scrap because they have
the capability to mix the scrap with other ingredients to create a specification secondary
ingot. As a result, secondary smelters use scrap to create a product whose properties are
precisely known.
Firms that make aluminum mill products or foundry ingot (for castings) from scrap
either are selective in their scrap purchases or have the ability to create a specification
product from a variety of scrap. Most of the scrap consumers' products are purchased by
industries whose buyers are familiar with the properties of different types of aluminum
products and are willing to buy products with recycled content as long as they meet the
buyers' needs. The use of recycled aluminum results in products whose quality is nearly
indistinguishable from products made from virgin materials.
4. Primary Producers and Secondary Smelters Have Been Closing Excess
Capacity
The high cost of raw materials and energy in the United States has shifted production
of primary aluminum overseas. Since 1980, non-scrap aluminum imports have risen to a
1989 level of slightly more than 1,500,000 tons per year, representing an increase of 126
percent. During the same period, domestic shipments of aluminum increased only 27
percent.20 With off-shore plants producing cheaper aluminum, both primary producers and
secondary smelters have reduced capacity. Since 1980, primary producers have reduced
their capacity approximately 18 percent below that year's high of about 5.1 million tons per
year.21 Several small secondary smelters have gone out of business and others have sold
plants. This reduced capacity is driven primarily by the energy prices faced by U.S.
aluminum producers, which average 77 percent more than energy prices paid by producers in
other market economy nations.22
This shift in capacity will not constrain the growth of UBC recycling, however, since
most can sheet is still made domestically. Even if the ingot were made overseas, domestic
mills still melt the ingot and roll the can sheet, so they will still be interested in purchasing
UBC as an input.
20 Aluminum Statistical Review for 1989, Aluminum Association, pp. 23, 23.
21 Ibid., p. 26.
22 U.S. Department of Commerce, 1990 U.S. Industrial Outlook, p. 17-1.
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5, Foreign Demand for Aluminum Scrap Is Strong
Counterbalancing the pressure on aluminum ingot from imports is a strong foreign
demand for U.S. scrap exports. About 650,000 tons of aluminum scrap were exported in
1989, which is approximately two times the exports of ten years ago. Nearly 60 percent of
those exports go to Japan, with only about 6 percent destined for Canada. Japan has almost
no primary production capacity. The Japanese aluminum industry uses imported primary
ingot (for 2/3 of its supply) and imported scrap (for 1/3 of its supply)23 to support a per
capita aluminum consumption that was fifth among industrialized countries in 1987.
Furthermore, half of Japan's aluminum imports from the United States is waste and scrap,
providing a large market for U.S. aluminum scrap.24
6. The Scrap Market Is Regional
Scrap consumers tend to buy scrap in the region where their plants are located. For
instance, a secondary smelter will generally limit its scrap purchases to a radius of 500
miles. One exception is UBC, whose high market prices allow it to be transported longer
distances.
7. Technical and Economic Factors May Limit Demand Growth in Some
Market Sectors
The ability of scrap consumers to use aluminum scrap depends to a great degree on
the quality of the scrap and on the firm's ability to deal with impurities. UBC is so
amenable to reuse (i.e., it can be freed of impurities and contains all of the right alloying
ingredients) that Reynolds Aluminum makes aluminum can body stock from 100 percent
scrap input.25 On the other hand, some scrap consisting of certain aluminum alloys must be
melted and mixed with certain alloying ingredients by secondary smelters before it can be
used again. However, assuming additional supply is generated and that consumers are
willing to pay the costs of processing, few technical barriers exist to replacing primary
aluminum with recycled aluminum.
The economic ease with which additional scrap can be collected and processed
depends on the type of scrap and the channel the scrap follows through the recycling path.
UBC, as mentioned above, is readily reusable in the production of can sheet; if more UBC is
collected, it will probably be absorbed easily by can sheet manufacturers. Absorption of
additional new scrap should be relatively easy, as well.
23 Aluminum Statistical Review for 1989, Aluminum Association, pp. 39, 53.
24 Ibid.
25 Personal communication with Charles Ray field, Vice President and General Manager,
Reynolds Aluminum Recycling Corp., September 2, 1988.
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For other forms of old scrap, however, the story is not as clear. Much of this scrap
is contaminated by attachment to or alloying with other materials. Scrap dealers and
processors will find it more expensive to process this additional scrap. Therefore, an
increase in supply that lowers dealers' and processors' costs of acquiring scrap may not pass
through completely to end users as a reduction in the price they pay for processed scrap.
Furthermore, much of this scrap is the type usually bought by secondary smelters, whose
output is mainly directed at the castings industry, which is largely dependent on the auto
industry. To successfully absorb additional old scrap, the secondary smelters will have to
open up new channels in which to sell their product (secondary specification ingot).
Alternatively, other scrap end users, such as foundries, will have to develop the capability to
recycle the additional old scrap themselves.
Trends in Aluminum Scrap Demand
A major trend in demand for aluminum scrap over the next few years will be the
continued expansion of scrap buying by consumers other than the secondary smelters. Can
sheet manufacturers continue to represent a growing share of scrap consumption. In
addition, foundries are beginning to make their own aluminum alloys from scrap and are
expanding their scrap purchases to include old scrap as well as the new scrap they previously
bought. These changes should increase demand for scrap as scrap finds new uses in the
scrap-consuming industries. As a result, the recovery rate for aluminum should increase
from its 1989 level of 27.5 percent.
While recovery is increasing, the overall market for aluminum is also growing, but at
a very slow rate. The consumer-related markets (such as beverage containers) should gain
steadily, although not as much as the 6 percent growth rate of the past several years. Total
aluminum deliveries to the containers and packaging sectors (27 percent of total 1989
shipments) grew 3.3 percent in 1989. Other markets such as the building and construction
sector (16 percent of 1989 shipments) declined in 1989. The other major sector,
transportation, lost 1.3 percent in 1989.26 Given this combination of markets and growth
projections, the Department of Commerce projects that the industry will experience an annual
growth rate of approximately 2 percent between 1991 and 1994,27 So, although the scrap
used per ton of aluminum produced will increase, aluminum production growth will be
sluggish.
The combination of falling primary aluminum prices and slow growth in real GNP
means that scrap prices are likely to fall in the next few years. The decline primarily
depends on how much primary prices drop. At the same time, however, the volume of scrap
moving through the market should continue to grow at a healthy rate.
26 Standard & Poor's Industry Surveys, August 30, 1990, pp. M75-M79.
27 U.S. Department of Commerce, 1990 U.S. Industrial Outlook, p. 17-3.
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IV. Government Intervention in Aluminum Scrap Markets
Governments are not major players in the aluminum scrap market, although
government programs at the federal, state, and local levels influence the markets. This
chapter discusses the desirability of increased government involvement in the aluminum
market, describes existing policies, and then considers potential federal involvement in the
market with the objective of increasing recycling. The list of potential initiatives is not
indicative of intended government actions or policies. Instead, it simply presents possible
scenarios for consideration should a determination be made that the market is not functioning
properly, and that government intervention is appropriate to address the problem.
Government Intervention in Markets
In cases where significant environmental problems result due to the existence of
market failure, EPA strongly supports the use of economic incentives (at the appropriate
jurisdictional level) rather than traditional command-and-control regulatory approaches to
address the environmental problem. With respect to the aluminum recycling markets, EPA's
conclusion to date is that, where government intervention is appropriate, incentive-based
options are best applied at the state and local level, where the solution can be tailored to the
particular needs of that jurisdiction.
Another reason to carefully consider government intervention is the current extent of
recycling. Aluminum recycling is well established and quite effective: The recovery rate
was 27.5 percent in 1989 and greater than 60 percent for aluminum beverage cans, there is
high participation among both consumers and industrial generators, and no significant
government barriers hinder the recycling of aluminum.
Summary of Current Involvement
Government influence on the aluminum scrap market is strongest at the state and local
levels where deposit laws and mandatory recycling are enforced. The programs in place
currently almost affect aluminum beverage containers exclusively and are important
influences on that portion of the scrap market. Non-container markets for scrap are
minimally affected by these programs because virtually all UBC is returned to use primarily
as cans; its content of other metals makes it inappropriate for many other recycled uses.
Deposit programs push additional aluminum into the scrap markets in particular
regions by assigning a value to the containers that is well above their actual scrap value.
This makes the containers available for entry to the scrap market at a lower collection cost
than would otherwise be the case because consumers, bottlers, and distributors subsidize the
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cost of collection. Mandatory recycling programs, a more recent state and local initiative,
will have a similar result; they will encourage consumers to supply used containers to the
scrap market, thus providing more low-cost aluminum for the scrap market.
Effects of Possible Federal Initiatives to Increase Aluminum Recycling
Supply Options
Supply-side changes are an important component of any program to increase the
quantity recycled. Efforts to model supply behavior leave unanswered the question of how
well supply responds to increases in price caused by greater demand. It may be that more
direct efforts to stimulate supply would be more effective.
Old Scrap
For increasing post-consumer scrap, federal programs could require can recycling,
either through mandatory recycling or through a financial incentive, such as deposits. Either
of these programs drives down the cost of obtaining scrap by shifting the cost of collection to
consumers (through their time and effort expended to save and return cans), collection
programs (also funded by consumers/taxpayers), and industry (in the case of deposits). This
low-cost scrap allows suppliers to provide more scrap at an even lower cost. Grants or loans
for establishing recycling programs would have the same effect, decreasing collection costs
by subsidizing collectors.
Tax incentives - such as property tax waivers (local), investment tax credits, and
accelerated depreciation for suppliers - would have insignificant effects because of the
dominance of scrap acquisition cost in dealers' and processors' total costs.
An alternative to decreasing the cost of scrap is to increase the cost of alternative
management. A fee on disposal at landfills would increase the advantage of recycling,
especially if, as is often the case, landfill costs do not reflect the true marginal cost of
disposal.
One of the most promising incentives that the Agency has identified with respect to
municipal waste services is unit-based pricing, which bases waste management rates on the
volume (or weight) of waste generated, thereby providing an incentive for households to
reduce the amount of waste generated. Unit-based pricing would also increase the supply of
recovered materials, since households would have an incentive to recycle rather than dispose
of materials. Further, households would have an incentive to purchase goods that minimize
waste generation (for example, the demand for goods with excessive packaging would
decrease).
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New Scrap
Generation of new scrap is much more geographically concentrated than is generation
of old scrap, which means that reducing collection costs does not provide as much leverage
as it does for consumer scrap. The result is that it is more difficult to shift the supply curve
for industrial scrap. Also, virtually all new scrap is already recovered.
Demand Options
Demand for scrap aluminum appears strong already, with major increases in scrap use
over the past several years. Virtually all new scrap is already recycled, and demand for old
scrap appears limited only by exogenous factors (e.g., the demand for finished products
containing aluminum, such as automobiles). In general, however, increased scrap use is
more limited by the supply side of the market. As a result, government intervention does not
appear necessary on the demand side if the purpose of government policy is to increase the
volume of aluminum recycled.
If demand intervention were indicated, several different approaches would be
possible. For example, the federal government could provide a tax credit to firms that
purchase mill products or ingot made from scrap. The credit would be based on the quantity
or value of the scrap content. A policy like this was debated in the late 1970s, with
secondary smelters opposing the intervention as unnecessary intrusion and scrap dealers and
foundries supporting the plan.
One direct federal initiative is procurement requirements for the use of scrap in
government and contractor purchases. The policy could require purchase of castings, ingot,
or sheet with a minimum recycled content or provide favorable treatment to suppliers with
products containing recycled aluminum. No apparent barriers exist now to the purchase of
recycled aluminum products, but these incentives would give recovered aluminum a
competitive edge. The federal government, however, purchases small amounts of aluminum
directly; consequently, a procurement requirement may have little impact on the market.
Conclusions
While these potential initiatives have their respective advantages and disadvantages,
there is a broader question of the desirability of any type of government intervention in these
markets. Some of the policy objectives, such as increasing supply, are already being
achieved through expanded recycling programs for used aluminum beverage cans. It is
important that government efforts not duplicate or replace existing momentum for change.
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References
"Aluminum Recycling: More Than Just Aluminum Beverage Cans", Phoenix Quarterly,
Winter 1987-88, Institute of Scrap Recycling Industries, Washington, D.C.
Aluminum Recycling Casebook, Aluminum Association, 1985.
Aluminum Statistical Review for 1987, Aluminum Association, 1988.
Cooperman, Richard. Aluminum Recycling Association.
Garino, Robert, Duane Siler, and Deb Levin. Institute of Scrap Recycling Industries.
Gordon, Richard L., The Collection of Nonferrous Scrap: A Literature Review of the Copper
and Aluminum Sectors, Pennsylvania State University, July 1972.
Industry Surveys, August 17, 1989, Standard & Poor's.
Meyer, M. Barry. Aluminum Association.
Minerals Yearbook, Volume 1, various years, U.S. Department of Interior, Bureau of
Mines.
1990 U.S. Industrial Outlook, U.S. Department of Commerce.
Producer Price Index, various reports, U.S. Department of Labor, Bureau of Labor
Statistics. -
Phoenix Quarterly, Fall 1981, Special Issue on Recycling Markets, Institute of Scrap Iron
and Steel.
Pollock, Cynthia, Mining Urban Wastes: The Potential for Recycling, Worldwatch Paper 76,
WorldWatch Institute, April 1987.
Rayfield, Charles. Reynolds Aluminum Recycling Corporation.
Recycling Aluminum, National Association of Recycling Industries, 1981.
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