Second-Half Slowdown Makes Suppliers Skittish
Though 2012 started off with a bang for aluminum, activity has slowed considerably in the second half. Long-term prospects for aluminum producers and distributors remain bullish, however.
By Dan Markham, Senior Editor
Following a strong first half, producers and distributors of aluminum report waning momentum in the second half as the market faces several strong headwinds, including the disappointing economic recovery in the United States, the fiscal crisis in Europe, a slowdown in China and uncertainty over the upcoming presidential election. All told, they point to a supply chain that is understandably skittish.
“The last couple of years have been that way. The first half of the year is really a gung-ho, ‘let’s get this recession behind us’ thing. Typically when we’ve had a recession, the next couple of years were boom times. But in 2010 and 2011, when we got into summertime, it just tanked on us,” says Keith Harvey, senior vice president of sales and marketing for Kaiser Aluminum, Foothill Ranch, Calif.
“Orders have slowed,” agrees Jeff Henderson, director of marketing and business development for Sapa Extrusions-North America, Rosemont, Ill. “We’re seeing that across the business, in all markets.”
Service centers report the same easing. David Pace, executive vice president and chief operating officer for Industrial Metal Supply, Sun Valley, Calif., says every quarter in 2012 has been worse than the previous one. “There’s a lot of weak consumer confidence driving this. All of the things you read in the paper, such as the fiscal cliff, are impacting demand.”
Aluminum prices reflect the downtrend. The cash price for aluminum on the London Metal Exchange peaked in early March around $2,300 per metric ton, then declined steadily until August, when it bottomed out around $1,800 per ton. Since then, it has rebounded significantly to nearly $2,100 at the end of September.
Despite the slowing in the second-half, the aluminum industry is on track to finish the year with gains over 2011. Sales are up this year in most of aluminum’s major end markets, executives report. And the data backs that up.
The Davenport Quarterly Aluminum Outlook forecasts that U.S. aluminum shipments will increase by 8.1 percent year-over-year, to more than 22 billion pounds. (That number was adjusted downward from the previous quarter, when the analysis firm expected 22.4 billion pounds to be shipped this year.) Davenport’s Lloyd O’Carroll projects a further 3.8 percent shipment gain in 2013.
Service center aluminum shipments were up 3.1 percent through August, compared to the same period last year, according to the Rolling Meadows, Ill.-based Metals Service Center Institute. Distributor inventories were up over August 2011, but down slightly from the previous month, averaging about 2.8 months of supply on hand.
“Inventories are pretty much in alignment, and people are just being cautious,” Harvey says. “Barring unforeseen disaster, 2013 could be a really good breakout year.”
2012 looked like one, with its gangbusters first quarter. Leading the way was the aerospace market, a chief driver of aluminum demand. Aluminum shipments to the aerospace sector are forecast to grow by nearly 16 percent this year and another 9 percent in 2013, according to Davenport & Co. (See aerospace article on page 16.)
The resurgence of the automotive industry also has taken aluminum along for the ride. North America’s car and light truck builders have been busy throughout the year and are expected to produce more than 14 million vehicles in 2012—a dramatic comeback from less than 9 million in 2009. “Automotive has been showing steady double-digit improvement year over year. Next year may not be up quite 10 percent when we’re done, but it will be close,” says Henderson at Sapa.
Aluminum continues to gain a larger share of the automotive market—often at the expense of steel—as carmakers strive to lighten vehicles and improve fuel efficiency. New government fuel economy standards that call for a doubling of the average miles per gallon by 2025 have brought a new urgency to the automotive materials race.
“If we take a forward view of the market, we talk about 25 percent compound annual growth,” says Brad Soultz, vice president of global specialties for Novelis Inc., Atlanta. “The growth could be much bigger one year over the next, but based on the engineering we know is under way, 25 percent on a level basis is quite solid.”
And the aluminum industry is gearing up to meet that demand. Novelis has a major expansion project under way in Oswego, N.Y., that will increase its annual production of aluminum sheet for automotive use to 250,000 tons, five times its current capacity. The expansion is to be complete by mid-2013.
Six months later, Alcoa will put the finishing touches on a $300 million investment at its Davenport, Iowa, facility that will allow it to tap into the growing demand for automotive aluminum.
Automakers in Europe, and even emerging economies, also are moving toward greater use of aluminum parts. “The same regulatory and consumer drivers that have pushed European and North American customers to this will certainly be in place in China, as well,” says Soultz, whose company has broken ground on a new production facility near Shanghai.
The transportation market for aluminum extends beyond automotive, and there the story is more mixed. Truck/trailer, an industry where aluminum has even greater market share, has not been as strong. Expectations were very high for the sector entering 2012, but the market has taken a tumble in recent months, executives report.
“One of the disappointments for the year in the transportation space would be Class A trailers and trucks,” Henderson says. “The slowdown in that market was a little unexpected and a little premature.” Sales to the market still remain above 2011 levels, however.
The flipside to the underperforming truck/trailer market is construction, a perennial laggard since the recession. “We’ve seen improvement in building and construction, both residential and commercial. That’s been encouraging,” says Henderson.
Even the areas most ravaged by the mortgage crisis are starting to trend positive. Greg Weekes of Eastern Metal Supply, a Florida-based distributor, says “housing is showing signs, albeit breathing through a straw. We’re seeing some signs of recovery in Florida.”
Even if it’s not robust growth, that construction may finally be moving in the right direction is what’s important, particularly considering the outsized role it plays in the entire economy, experts say. Strong growth in residential construction foretells better fortunes for a host of related manufacturing segments.
“I don’t see anything but continued growth at some level,” says John Mitchell, vice president of sales, marketing and development for Lincolnshire, Ill.-based Nichols Aluminum. “I’m not going to say we’ll get back to 1.5 million housing starts, but we’re certainly going to move in that direction over the next 2-5 years. Whatever it takes to get there, it will all be a plus from today.”
Henderson believes the real breakthrough in housing will happen when the unemployment figures drop a bit further. Getting below the 8.0 percent threshold may provide the positive reinforcement the economy needs. “I think psychologically, if the unemployment number starts with a 7, it may have some impact on buying decisions in the retail space,” he says.
Sales to other aluminum markets are flat to up slightly for the year, including energy, electronics and general industrial. “Our markets are basic precision sheet metal shops, truck trailer and the recreational boat segment. All of them are at least fairly steady to maybe a slight bump upward,” says Sandy Nosler, president of Pacific Metals Co., Portland, Ore.
Aluminum is not a major player in the energy market, though it does have a small piece of the solar business. Henderson thinks that market may be primed for a big year in 2013. Federal incentives for certain solar applications are set to expire at the end of next year. Companies looking to take advantage of the breaks before the expiration date must do so within the next 14 months. “Wind power saw the effect of that [expiring government tax breaks] this year. They had a very strong year as people tried to beat the deadline. We could see the same kind of run-up in solar next year,” he says.
Though electronics is not a major market for aluminum, the trend toward smaller and lighter devices favors nonferrous alloys. “If you look at electronics, everything is hand held,” notes Pace at Industrial Metal Supply. “It doesn’t require much material, but the market is gravitating toward aluminum.”
“New consumer products are being launched on a regular basis with more and more aluminum,” Soultz agrees. “There’s quite a lot of excitement from Novelis’ perspective on how aluminum will continue to grow its position in electronics.”
Aluminum can become a more dominant player in many markets, if it does a better job of marketing its inherent advantages, Henderson says. “We still have to do a better job as an industry to promote the use of aluminum and the engineering of products with extrusions. This is paying great dividends in areas like automotive and solar. It helps that we have the best story, because we keep winning even with our relatively modest attempts.”
While aluminum’s long-term outlook may be positive, short-term questions remain. Among them is the continued overhang of material in LME warehouses around the world, currently inaccessible to the market. “At some point in time, when the financial deals that tie it up become less attractive, it could have a significant impact on the market,” says Mitchell at Nichols Aluminum.
Nathan Kahn, president of Empire Resources, Fort Lee, N.J., believes the industry is somewhat protected from any serious disruption if these currently untapped stocks are loosed on the market. “As long as interest rates stay low, it’s unlikely that metal is going to leave the warehouses. If interest rates start inching back up, maybe the financial deals will be less attractive to the investment community, but that would also imply the economy was getting better.”
Kahn says the persistent price gap between Midwest premium and the LME is confounding, and contributing to some uncertainty in the market. “That just adds to the consumers’ unwillingness to invest in stock at prices they feel are a bit high.”
To Harvey, this uncertainty is all that stands between the industry and a genuine boom market. “Fear itself is our biggest enemy right now. If we can get where the future is a little more certain and we’re on fair footing and ready to compete, the future bodes well for us.”