A battle for beer cans

You might not think much about the humble beverage can. You drink your beer or soda and never really worry where the can goes next. As the Wall Street Journal tells it, however, there is an interesting supply chain story behind that can (The Aluminum Can Wars Begin, Sep 25).

The first thing to realize is that the numbers involved are kind of crazy. The US  uses around 90 billion aluminum cans a year (see the graphic at right). A large fraction of those get recycled, so the aluminum you use today may be melted down and back in your hand by December. Using old cans to make new ones is slightly cheaper but notably has huge energy savings.

Used beverage cans usually trade at around 20% less—currently at about 81.5 cents a pound versus $1.04 a pound—than the value of primary aluminum.

The costs of cleaning and processing make cans only marginally cheaper.

Those prices have stayed consistent over the last five years.

Novelis [an Atlanta-based unit of India's Hindalco Industries] says it believes using more cans will allow it to increase sales in places where lower carbon footprints have a marketing value, and to set itself up to minimize carbon taxes if they are implemented. “It’s a long view, but this helps protect our business from the impact of regulatory changes,” says Derek Prichett, Novelis’s vice president for global recycling.

In a world in which retailers like Wal-Mart want to slap some kind of green-index on all products its sells, sodas in cans from recycled aluminum could be at a real advantage.

That gets to the supply chain question: How does an aluminum producer get used cans?

Cans make up 2% of the volume of recycled trash, but 40% of the value, according to the industry.

It takes about 25 cans to make a pound. By comparison, recovered paper is currently trading for between five and 20 cents a pound, and the plastic used in beverage containers for between 15 and 30 cents a pound, according to the Institute of Scrap Recycling Industries.

“Municipalities are realizing they can make money off cans, and increasingly, government authorities are auctioning off the cans they collect,” said Lloyd O’Carroll, an analyst with Davenport & Co. of Richmond, Va.

While Novelis and Alcoa duel for cans and ponder alternative collection methods, the biggest aggregate source is still old-fashioned scrap yards, which collect and sell about 40% of all recycled aluminum cans.

What the article focuses on is that Novelis and Alcoa until recently had a joint venture to collect cans. Novelis recently pulled out of the JV to have more flexibility in how it sources used cans in particular so it can import cans. In some ways they need the additional flexibility because of how its production network is structured.

Alcoa is a massive producer of primary aluminum. With only one smelter of its own, in South America, Novelis must rely on other companies for most of its raw aluminum. And it says it needs more flexibility in how it buys scrap.

This is an interesting challenge. Aluminum cans are essentially a commodity and competing in the market will require a reliable supply. Now there will be two big buyers in the US market. That should bid up the price for municipalities and scrap yards. The question then is whether higher prices are enough to drive up the return rate significantly or whether the current rate of around 65% is as high as it can reasonably go.

A final point. There are similar issues with firms manufacturing products from recycled paper. We have posted about that in the past.