Aluminum Forecast
Calls for Moderation

The party’s certainly not over for producers and distributors of aluminum—the market’s still rockin’ and rollin’—but perhaps it’s time to turn the music down a bit and switch to coffee for the ride home.

Experts predict that aluminum demand around the world will double in the next decade, but of more immediate concern is what’s going to happen next year. Softness in the housing, automotive and truck-trailer markets is bound to affect orders and shipments. The recent downtrend in pricing—aluminum dipped by 6 percent in the third quarter—is bound to put pressure on profits. Service centers must be wary of inventories creeping ahead of demand in the months ahead.

Consumption of trucks and trailers has artificially inflated aluminum demand in the past two years. Trucking companies have been actively buying ahead of new federal emissions standards that take effect Jan. 1. Those standards require that trucks be powered by cleaner—but more expensive—engines. Once the deadline passes, so does the incentive for carriers to upgrade any remaining old equipment, thus production of medium- and heavy-duty trucks could plunge by up to 30 percent in 2007, says analyst Lloyd O’Carroll of Davenport & Co.

Demand for trailers and semi-trailers made of aluminum has reflected the spike in truck demand. O’Carroll predicts trailer production will decline along with truck production next year, though to a lesser degree, about 8 percent.

Steel suppliers are more threatened than aluminum suppliers by the flat prospects in the passenger car and light truck sector. North American automotive output is forecast to dip from around 15.8 million to 15.5 million units this year and next as a result of production cuts by ailing automakers. But in their quest for ever more fuel-efficient vehicles, automotive designers continue to substitute aluminum in place of heavier materials. The aluminum content per vehicle will reach 329 pounds in 2007, up from 295 pounds in 2004. So, despite the decline in the number of vehicles coming off the assembly lines, O’Carroll expects that aluminum shipments to the auto industry will actually increase by 4.8 percent next year.

As the cover photo suggests, demand for aluminum is skyrocketing in the aerospace market. O’Carroll estimates that 650 million pounds of aluminum will be consumed by aircraft manufacturers this year and 718 million pounds in 2007. But as one executive points out, “aerospace borders on being a niche market for aluminum. It is a high-quality, high-margin market, but it will not make or break the aluminum industry.”

The flagging housing market—perhaps the biggest concern for the economy overall—will not leave aluminum out in the rain, O’Carroll says. Weakness in new-home building will be offset by reasonably strong nonresidential construction, inventory restocking and hurricane recovery in the South. He expects a slight increase in aluminum shipments to the construction sector this year, and only a slight decline to the sector in 2007.

The Metals Service Center Institute reports that at the end of September, before the normal seasonal slowdown, U.S. distributors’ aluminum inventories were already up 8.6 percent vs. the same time last year. 2006 has been a great party for aluminum, and the celebration is likely to continue into 2007, but an inventory hangover could still cause some headaches.