“I’m not very optimistic. I’m of the opinion that we are looking flat at best next year vs. 2007,” says Jerrod Hoeft, director of national accounts for Indalex Aluminum Solutions, Lincolnshire, Ill. Hoeft delivered similar words of caution at the Metals Service Center Institute’s Forecast 2008 conference in September.

Parks Dodd is scheduled to offer a comparable diagnosis at this month’s MSCI Aluminum Products Division meeting in California. “It’s a fairly pessimistic outlook,” says Dodd, president of Aluminomics LLC, a research and advisory firm for the aluminum industry. “I’m not looking for 2008 to be much of a year.”

The degree of pessimism expressed by industry executives is proportional to their exposure to the residential construction market, which continues its downward spiral under the weight of the sub-prime mortgage crisis. “As far as the housing market goes, I don’t see the end of the bad news,” says Dodd. “It might be the spring of 2009 before we see things turn around.”

Hoeft, whose company specializes in aluminum extrusions, agrees that the end of the housing slide is difficult to pinpoint. “The residential mortgage crisis hit when we were already in a slowing demand market, which has pushed everybody way off as far as trying to predict when things will come back.”

According to analyst Lloyd O’Carroll of Davenport Equity Research, which prepares the O’Carroll Aluminum Bulletin, residential construction has been plummeting since it reached a 34-year peak of 2.3 million starts in 2006. As of this July, it had fallen to 1.4 million starts. Residential investment declined 5 percent in 2006, and is projected to decline by double digits in both 2007 and 2008.

Hoeft says the fallout from the credit mess will have an impact beyond the housing market. “The economy is still 70 percent driven by consumer spending,” he says. “If you look at what’s happened in the mortgage market, consumer debt has to be extremely high. It’s going to take longer to spend more, because spenders will have a lot of debt to pay off.”

That debt load is only compounded by high energy prices, which will siphon off even more of consumers’ available funds.

“We need the residential market to settle out, and we need gas prices to drop as well, for the consumer to really start spending,” Hoeft says.

Fortunately for all, current conditions don’t portend recession. “To suggest that the economy has been suddenly brought to its knees by a pullback in financial markets stemming from a fallout in sub prime mortgage lending is overstating reality,” says O’Carroll. “We think the proper perspective is that the economy will likely grow at sub-par rates (less than 3 percent) over the next few years, as a drawn-out correction in the housing bubble and the ripple effects on other sectors place a headwind on the economy that won’t soon go away.”

Still, he says, there are enough positives, including reasonable job and income growth, a brighter trade outlook, greater government spending and balanced inventories, to prevent a contraction of the economy.

Another traditionally important market for aluminum suppliers is transportation, and the news on that front is also bleak, at least for the near term. DesRosiers Automotive Consultants Inc. of Richmond Hill, Ontario, predicts that North American vehicle production is facing an additional downside threat of 3 to 5 percent in 2008 and 2009, before what should be the start of a long-term growth cycle.

Recent positive news on the labor front at the Big Three should prevent any prolonged work stoppages that further hamstring the market, adds Richard J. Greaves, president and chief operating officer of ThyssenKrupp Materials NA.

The forecast is even more dire for trucks and trailers. “From what I’m hearing, there’s no positive news for next year. At this point, there’s hope things remain flat in the fourth quarter, which is still down considerably from 2006,” Hoeft says.

The decline in the Class 8 truck market was anticipated, as trucking companies went on a spending spree in 2006 in advance of new emissions standards that took effect this year. Heavy truck production was down more than 40 percent in 2007, and any rebound in 2008 will likely be minor.

“Some people think the truck market is coming back, but I don’t think so,” says Dodd. “There will probably be a little bit of growth, but not much more than 1 to 2 percent.”

Trailer manufacturing has not suffered to the same degree, but production is off in the 15 to 20 percent range, Dodd adds.

Overall, U.S. aluminum shipments declined by 8.9 percent through the first six months of 2007, according to data from the Aluminum Association, Washington, D.C. Apparent consumption was off 7.6 percent over the same period.

Though the housing and transportation markets are negatives, there are some positives for the aluminum industry, in addition to aerospace. Chief among them is defense spending, which is expected to grow by 2.5 percent in both 2007 and 2008.

“If you happen to be producing heavy gauge plate to shore up the bottom of a Bradley fighting vehicle, you’re in good shape,” says Dodd.

Kaiser Aluminum Corp., Foothill Ranch, Calif., is among suppliers benefiting from the increase in defense spending. “Kaiser is supplying a tremendous amount of material for armor,” says Keith Harvey, vice president of sales and marketing. “As those types of requirements come up, we’re ready to jump in there.”

Another cause for optimism among U.S. mills is the shift in the export market. The weak dollar and strong overseas demand has created the most attractive conditions for exports in a long time. The result should be a narrowing of the U.S. trade imbalance for the first time in years, O’Carroll says.

“Exports appear to be the bright spot,” Greaves says. “Manufacturers are benefiting from the lower valuation of the dollar, in particular against the euro and the Canadian dollar.”

Of course, imports remain a consideration. As is the case in all industrial markets, China is a major player in aluminum. China is expected to ramp up annual production by 34 percent to 12.5 million tons, according to Alcoa Chairman and CEO Alain Belda. Its consumption will grow even higher, however, leaving China a net importer in 2008. Still, Belda says, “China remains the driver of growth.”

To counter such competition, Kaiser has announced plans for $140 million in new investment, which includes a $91 million program to enhance rod, bar and tube production through the construction of a new plant in the Midwest.

“There are two ways to go in these decisions—you can cede the market to those new competitors or you can continue to invest and take them on,” Harvey says. “Our focus is to continue to get very efficient, low-cost, high-production facilities that can compete against small independents and imports.”

The company has not announced a site for its new facility yet, though Harvey says the bigger holdup on the project is getting equipment on order. Kaiser hopes to have the facility operational by the second half of 2009.

While larger public companies like Kaiser are tackling foreign producers head on, smaller distributors such as Erickson Metals Corp., Cheshire, Conn., prefer to sidestep competition from cheap imports by identifying small niche markets.

“Enough people are wondering how they’re going to compete with the Chinese. Well, we don’t want to. We want to identify markets they’re not interested in. That’s worked well for us,” says Robert Stiles, vice president of operations for Erickson.

Stiles says his company is fairly upbeat about its prospects for 2008, serving such smaller segments as the cosmetics industry, which uses Erickson’s deep-drawn products as lipstick tubes, for example.

“We try to identify niche areas we can be good at, and where we can demand a little bit of a premium for our product because of some quality requirements,” Stiles says.

Dodd says companies such as Erickson are in a better position entering 2008, as the distribution market figures to be stronger than others in the aluminum sector. “That market includes general purpose capital goods manufacturers and machinery applications, where investment spending has held out,” Dodd says. “So the distribution market is going to be down some, but not as much as overall shipments.”

Erickson, like the rest of the metals industry, has spent much of 2007 paring down its inventory to better match demand. “We have been aggressively working our inventories down this year. We could continue to go lower, but we want to manage them down, we don’t want to just cut them,” Stiles says.

According to MSCI’s Metals Activity Report, U.S. aluminum inventories have dropped by about 30 percent, from a high of 392,000 tons in October 2006 to the September level of 272,100 tons.

Harvey would like to believe the inventory correction has run its course, though each new MSCI report shows service centers continuing to liquidate. “Every time we say it has reached bottom, inventories continues to get lower,” he says. “But generally, when people get to 2.5 months [supply], it appears to be in sync. I know they feel a lot more comfortable about supply and demand.”

His fear is that the aggressive destocking might come back to bite the industry. “The concern the mills have is that we have taken out a lot of the margin,” Harvey says. “It will test us as far as response times and lead times if demand bounces back quickly.”

If the experts are correct, such a bounce is unlikely anytime soon.