While demand for aluminum is sky high in the aerospace sector, expectations for other markets are more down to earth.

By Myra Pinkham,
Contributing Editor

The aluminum market has fared well in 2006 despite well-publicized softness in the housing and automotive markets. Next year is questionable, however, given that the strong truck and trailer market is expected to weaken as well.

All aluminum end-use markets currently are quite strong except for housing and the North American automotive market, says Kevin Lowery, spokesperson for Pitts-burgh-based Alcoa Inc. The long-term outlook for aluminum consumption remains bullish, he adds. “It is predicted that aluminum demand will double in the next 14 years and that at least 80 new smelters would be needed to meet this demand. And that doesn’t even include the alumina and bauxite mines that would be needed to support that.”

Charles Bradford, metals analyst and principal of Bradford Research in New York, is also very upbeat about the market’s prospects. “The world economy is doing well. As long as it continues to grow, aluminum should continue to grow.” With copper and other commodity prices so high, aluminum should be able to gain market share in new applications, he adds.

Preliminary statistics from the Aluminum Association, Arlington, Va., place net shipments, including exports, by U.S. and Canadian aluminum producers at 16.28 billion pounds for the first eight months of 2006. That figure shows a 3.1 percent gain compared to the first eight months of last year, with shipments of mill products up 1.2 percent and ingot shipments up 7.1 percent.

“Trucks and trailers have been holding up the market,” says analyst Paul Williams, research manager for aluminum semifinished products at CRU International Ltd., London. “[Truck-trailer] has been strong for the past couple of years, and it is still strong for the moment, though it could come off a bit in 2007.”

This view is supported by analyst Lloyd O’Carroll, senior vice president of research for Davenport & Co., Richmond, Va., who forecasts in the third-quarter Davenport Quarterly Aluminum Outlook that production of medium (Classes 5-7) and heavy (Class 8) trucks will increase 7.4 percent this year to 629,000 units, but then decline sharply by 24 percent to 480,000 units in 2007.

He attributes much of this up-and-down to the heavy duty truck segment, where demand has been “unusually high” the past few years as buyers bought ahead of upcoming federal emissions regulations requiring that trucks be powered by cleaner burning, but more expensive, engines. That new regulation takes effect Jan. 1.

“Consequently, production was up 27 percent in 2005. It probably would be up even more than we’re projecting for 2006 (a rise of 8 percent to 369,000 units) if it weren’t for capacity constraints on the part of truck manufacturers,” O’Carroll says. He forecasts a 30-plus-percent drop in 2007 to 250,000 units.

Weakness in the truck-trailer segment is likely to be short-lived, maintains Bill Sales, senior vice president for nonferrous operations at Reliance Steel & Aluminum Co. in Los Angeles. He predicts that volumes will come back again in 2008 and beyond as buyers need to replace older units.

Trailers are another “standout” area for aluminum demand, says Nick Adams, director of statistics and economics for the Aluminum Association. Demand for trailers and semi-trailers has been growing strongly for the last few years, but may have peaked. “We think trailer production should decline with truck production, but at a more muted rate,” writes O’Carroll. He predicts trailer output this year will grow by 7 percent to 275,000 units and then fall 8 percent to 253,000 units in 2007.

Aluminum’s transportation sector, driven by production of passenger cars and light trucks, has been flat at best, Adams says. Through August, Canadian vehicle production is up 1 percent, while U.S. production is down one-half percent. Given recent production cuts by the Big Three automakers, O’Carroll predicts that North American automotive output will decline 1.4 percent to 15.5 million units in 2006, with light trucks feeling the brunt of the decline. In 2007, light vehicle production could rise a bit to 15.6 million units.

Substitution, he says, could add three to four percentage points to the growth rate of aluminum shipments to the automotive industry. The aluminum content per vehicle should rise to 329 pounds in 2007 from 295 pounds in 2004. “Between substitution and the expected decline in auto production, we estimate aluminum shipments to the auto industry should increase 2.5 percent in 2006 and 4.8 percent in 2007,” O’Carroll says.

Bradford cautions that somewhere between two-thirds and three-fourths of this aluminum is secondary material, meaning that the secondary suppliers will feel the weakness much more than the primary producers.

Meanwhile, the aerospace market is booming and should remain strong into 2008 and beyond (see related article). Aerospace demand is contributing significantly to the strength of the aluminum market, says Richard J. Greaves, president and chief operating officer of ThyssenKrupp Materials NA Inc., Detroit. O’Carroll expects 650 million pounds of aluminum to be consumed by the aerospace market this year and 718 million pounds in 2007.

Building and construction remains a growth market, with much of that growth in commercial projects and less in residential, Adams says. In fact, O’Carroll adds, the housing market is falling faster than expected. Weakness in the housing sector will likely last through 2007, though it could be offset by a stronger-than-anticipated nonresidential market, inventory restocking and rebuilding related to last year’s hurricanes. The net result will be less than a 1 percent increase in aluminum shipments to the construction sector this year and a slight decline in 2007, O’Carroll predicts.

Another weakening factor, CRU’s Williams observes, is a slowing in home renovations. “With more money being spent on fueling cars, people have less disposable income to spend on their houses.”

During Alcoa’s recent third-quarter conference call, Joseph Muscari, executive vice president and chief financial officer, noted the possibility of fourth-quarter weakness in common alloy products as distributors adjust year-end inventories. The Metals Service Center Institute, Rolling Meadows, Ill., reports that at the end of September, U.S. aluminum service center inventories were up 8.6 percent from a year earlier while service center shipments were down 1.7 percent. Year-to-date, service center shipments were up 3.4 percent vs. the first nine months of 2005.

“Our aluminum inventories are in good shape,” says Greaves. “But we are never satisfied with where we are on inventory levels and will constantly look to take unnecessary inventory out of the supply chain without impacting customer requirements.”

Sales expresses a similar sentiment, stating that while Reliance’s inventories are about where they should be, the service center chain will continue to bring them down through year end. “As an industry, I really don’t see an inventory problem on the aluminum side,” he says.

The aluminum market has also benefited widely from metal substitution. “With the high price of copper, it’s a no-brainer that some end-users would switch to aluminum for such applications as air conditioning, wires and even car radiators,” Bradford says. “This kind of switching will always occur when aluminum is more affordable. Once aluminum captures a market it usually keeps it, because it’s too expensive to switch back.”

Overall, suppliers agree, aluminum market fundamentals are strong. Except for the shortfall of 2000- and 7000-series heat-treated plate in high demand from aircraft manufacturers, “supply and demand is pretty much in balance,” says Reliance’s Sales.

“Aluminum extrusions have been plentiful throughout the cycle, and it has been a similar story for common alloy aluminum coil,” Greaves notes. Sales places lead times for common alloy at about eight weeks. “Domestic business has hung in there. The domestic mills would like to have a stronger backlog, but they do have a full order book.”

O’Carroll expects primary aluminum production capacity to grow an average of about 3.4 percent worldwide over the next four years. Little of that is likely to occur in North America, however.

Alcoa did announce that it would be restarting a second potline at its Intalco Works in Ferndale, Wash., in the first half of 2007, adding 7,500 metric tons of monthly capacity. That will bring the facility up to 180,000 tons per year, which is two-thirds of its rated capacity. Likewise, Ormet Corp. is expected to restart its Hannibal smelter in 2008. These restarts, however, are relatively small, Adams notes.

Lowrey says that Alcoa has a number of growth projects on the books, the earliest being its greenfield Fjardaal smelter in Iceland, which will produce its first metal in 2007.

All factors considered, 2006 should conclude as an excellent year for the aluminum industry. Indeed, Alcoa earned more in the first nine months than in any full year in its history. Next year may prove a bit softer though, experts warn. “But I don’t see a significant downturn,” Williams concludes. “There could be mildly negative growth, but the economy remains reasonably sound.”