Macquarie: Rising scrap use unlikely to replace need for primary aluminum

By Pandu Setiabudi

The use of recycled aluminum is expected to continue increasing as countries pursue decarbonization goals. However, it is unlikely to replace primary aluminum production from smelters for a considerable period, particularly in China, where scrap prices are increasingly approaching those of primary aluminum, according to Joyce Li, a commodity analyst at Macquarie, speaking at the recent Indonesia Critical Minerals Conference.

“The price discount for scrap against primary metal is becoming narrower and narrower,” Li said.

She explained that price has historically been the main driver behind the use of scrap over primary aluminum in China. As the price gap continues to narrow, the economic incentive for processors to increase scrap usage is diminishing.

“Actually some processors are not willing to increase or even decrease a bit for their scrap usage this year, which is purely driven by price,” she said.

Under these conditions, Li believes only large companies facing pressure from customers to produce low-carbon products will continue increasing their use of scrap.

“Only for those really large ones there, considering that their end-user consumers require low-carbon products, they will continue to increase the scrap usage,” she said.

The Chinese government has been encouraging greater use of aluminum scrap in recent years as part of its industrial decarbonization efforts, although implementation challenges mean progress remains gradual.

Nevertheless, Li remains positive about the long term outlook for recycled aluminum. According to her, growth in scrap usage will be determined by two key factors: price competitiveness and government policy support, similar to developments already seen in Europe.

“In the US and Europe, already very high at over 30% or even 40%, but for China currently it's only 25% now,” Li said.

She added that decarbonization policies being implemented in a number of countries, including China, will continue to encourage greater use of recycled aluminum. However, the transition is likely to take longer than many market participants currently expect.

“They will continue to try to improve this process, but still, in practical, there's going to be a longer process than what we can expect in the following years,” Li said.

Editing by Reiner Simanjuntak