Aluminum Outlook: 'Just Wait Till Next Year!'
Expectations of a strong year were dashed early in 2013. Does the coming year hold more promise for nonferrous metals?
The aluminum industry was awash with optimism at the dawn of 2013, with great promise from the soaring aerospace industry, an automotive industry that was growing in both volumes and its use of nonferrous materials, and a residential housing market that was poised for its first meaningful pick-up in half a decade.
Reality set in very early. The aluminum market, much like other commodities, has languished for most of 2013.
“We expected a different set of dynamics to be in play,” says Russ Brown, president of Nichols Aluminum, Lincolnshire, Ill. “It has improved over the last couple of months, but it doesn’t make up for the dilution we had in the late-spring time frame.”
Numbers from the Metals Service Center Institute tell part of the story. Service center aluminum shipments in the United States declined 4.6 percent to 1.0 million tons through the first eight months of the year. In Canada, the story was similar, with shipments off 3.9 percent to 105,000 pounds.
Overall, Alcoa projects North American primary aluminum production will grow 4.0 percent in 2013, while global growth is at 7 percent.
Further challenging the industry is the pricing pressure felt throughout most of 2013. On the LME, the price of aluminum has fallen from highs near $2,200 per ton in January to the mid $1,700s in September.
“It’s a battle every day,” says Nathan Kahn, president of Empire Resources, Fort Lee, N.J. “People are ordering as needed, with not a lot of orders for the future. Pricing remains under pressure.”
That sentiment is echoed by Willie Portnoy, president of Charleston Aluminum, Gaston, S.C. “Given the economic projections from last year, we were anticipating a stronger year than we’re having. I don’t see the balance of the year making any great strides.”
At least one distributor has bucked the trend. Calum Donnachie, vice president of aluminum purchasing at Samuel, Son & Co., Ltd., says his Mississauga, Ontario-based company’s shipments have improved slightly year over year. “There’s a lot of negativity in an extremely competitive marketplace. That makes it feel worse, but the reality is it’s OK in volumes.”
On the other hand, Donnachie acknowledges, Samuel has gained market share but not margin. “Our margins had been fairly consistent year over year, even through 2009. But now we’re seeing margins worse than we’ve seen in years. Our market share has gone up, which is a reflection that we’ve competed well to maintain volume, but we’ve paid a price.”
Compressed margins are an issue throughout the supply chain. “Service centers are tightening their belts. They’re dealing with pennies, very insignificant margins. It’s a battlefield out there with those guys,” says John McClatchey, sales manager for Atlanta-based Southern Aluminum Finishing Co.
On the other hand, some of the decline in activity is attributable to a liquidation of inventory. MSCI reports that service center stocks of aluminum are down 4.1 percent year-over-year in the United States and 8.6 percent in Canada. Distributors in both countries have less than three months of supply on hand. And that figure might go lower in the coming months.
“Many of our customers are very focused on inventory levels, especially as we head into year end,” says Gary Yogen, vice president and general manager of light gauge and specialty products for Novelis, Atlanta. “The market has been below forecast, and distributors have shifted the focus to inventory management.”
The flipside of tight inventories is that any growth in demand next year will pay immediate dividends. “That’s our one bright spot. If 2014 is the same as 2013, we’ll be OK. If it’s worse, we’ll still be OK. But if it’s a lot better, we’ll all be in great shape,” says Kahn, whose company serves as a master distributor of aluminum products.
So what’s the prevailing forecast for 2014? Most industry executives expect a slightly better year, based on some of the same factors that drove the optimism heading into 2013. The North American automotive market should remain the industry’s strongest sector, with aluminum grabbing a bigger piece of the materials pie. And residential construction is expected to see an even more robust gain in 2014. The National Association of Home Builders forecasts a 32 percent increase in single-family housing starts next year, following an 18 percent increase in 2013.
“The residential piece is progressing at a good pace in many areas,” says Brown at Nichols Aluminum. “Our markets are certainly in good position to see growth going into 2014 and beyond.”
Residential is also a major destination for extruded aluminum products. Industry giant Sapa is eager to see what happens as the residential market regains its footing.
“Some of the extrusion companies that were really dependent on residential building and construction went out of business or idled presses over the last three or four years. We feel like we’ve grown market share as a result of that,” says Patrick Lawlor, president of Sapa AS North America, Rosemont, Ill. “As residential comes back, it will be interesting to see how that dynamic plays out. Will extruders come back into the market or will new players invest here?”
The expected uptick in residential activity is why Samuel is anticipating overall aluminum shipments to increase by 3-5 percent in 2014. “While residential construction is heavily mill-direct, we do get involved down the line,” Donnachie says. “We hope it’s going to be a slow increase next year.”
A similar slow pace is in store for commercial construction, another key end market for aluminum suppliers. The market tanked in 2009-10, but is finally beginning to rebound. Kermit Baker, chief economist for the American Institute of Architects, projects growth of 7.6 percent in nonresidential construction in 2014.
“The nice thing about the commercial construction market is there’s plenty of forecasting. You know what’s going to happen before it hits because you lag the economy,” says Penn McClatchey, vice president of marketing for SAF, which recently completed a new anodizing line at its Reading, Calif., facility. “And that market is starting to show signs of life. We’re feeling optimistic.”
Demand for aluminum from automakers and their parts suppliers is proceeding at a more rapid pace. North American auto production is close to pre-recession peak levels, with still more room to grow. More important to the industry is the well-documented shift to more aluminum in each car and truck, a 40-year-trend that will pick up speed due to greater fuel economy requirements. Ducker Worldwide estimates that by 2025 the average North American light vehicle will contain about 550 pounds of aluminum, accounting for 16 percent of the total material content, up from the current 343 pounds.
Companies such as Alcoa and Novelis are in the process of completing major investments to meet the expected increase. Alcoa is investing $300 million in an expansion project at its Davenport, Iowa, facility, and has announced a second investment at its rolling mill in Alcoa, Tenn., both driven by auto customers. Novelis is in the process of commissioning a $200 million automotive sheet expansion at its Oswego, N.Y., mill, following a similar upgrade at its Kingston, Ontario, plant. Altogether, Novelis will grow its automotive aluminum capacity five-fold.
Yet such investment still may not be enough. “We see demand for auto sheet continuing to outpace supply for the foreseeable future,” says Novelis’ Yogen.
While aluminum mills are upping production in anticipation of new demand, auto-heavy distributors such as Samuel are also angling to take advantage of this evolving market. “We’re obviously working hard to entrench ourselves as a recognized distributor in that market. But there are so many variables and so many unknowns, nobody really knows what it’s going to look like in five years,” Donnachie says.
However it shakes out, it figures to be a major boon for the entire supply chain, he adds. “It’s an opportunity we won’t see again in our lifetime, comparable to when the beverage can went from steel to aluminum.”
The gains won’t just benefit aluminum sheet. Use of aluminum extrusions is also growing in such applications as running boards, side fills and structural supports, says Sapa’s Lawlor. The U.S. typically lags the European markets in extrusion usage, offering more upside for greater penetration of the product in the future, he notes.
Norway-based Sapa made some of the biggest headlines in the supply chain this summer with the completion of its merger with fellow Norwegian company Hydro, creating the world’s largest extrusion company. The combined entity now operates under the Sapa name. In the United States, Sapa will operate 23 facilities in the U.S. and Canada, with nine cast houses, 10 paint lines, five anodizing lines and 68 extrusion presses. Though the company’s European operations are expected to undergo some consolidation due to overcapacity, little of that is anticipated in the U.S. “It’s a complementary fit overall, both from a geographic standpoint and from a capability standpoint,” says Lawlor. “We see the need for the vast majority of those locations going forward.”
Donnachie is not as certain. He believes there may be too many extrusion presses in North America, a situation he hopes the merger alleviates.
Supply is also being affected by imports. Numerous executives lamented the entry of so much low-priced product, putting pressure on North American mills.
“When we buy anodizing-quality material from overseas, there’s certainly more risk involved, but the pricing is astonishingly so much lower that sometimes you feel you have no choice but to give it a shot,” says Penn McClatchey. “At the same time, we want to support North American manufacturing infrastructure. It’s an ongoing dilemma.”
Donnachie is perplexed by the prices offered. “If you look at what the Shanghai (price) has done, it’s around the Midwest price. They should be at a disadvantage. A lot of the things that go on in China are difficult to understand.”
["It's a battle every day. People are ordering as needed, with not a lot of orders for the future. Pricing remains under pressure." Nathan Kahn, Empire Resources]