October 2016

Aluminum's Strength Eludes Distributors

Global production of aluminum is growing, but U.S. and Canadian service centers are not getting a full share of the gains.

By Dan Markham, Senior Editor

The aluminum industry is holding its own in a sluggish global economy, say the experts, but for some North American distributors of nonferrous products it’s more a case of just holding on.

Most U.S. mills demonstrated flat to modest growth in aluminum production through the first three quarters of the year, driven by a strong automotive market and solid results from a few other key end uses. Aluminum giant Alcoa projects global demand growth of 5 percent in 2016, with 4 percent growth in the North American market. Other producers are offering similar projections.

Service centers, however, are not so lucky. Aluminum shipments from metal service centers have declined this year, according to the most recent data from the Metals Service Center Institute. U.S. service centers have shipped 1.0 million tons, a 4.7 percent decline from the first eight months of 2015. The situation is worse in Canada, with shipments of aluminum products down double digits from the prior year.

Some of that shipment decline is tied to inventory drawdowns. U.S. service center supplies are down 2.9 percent compared with August 2015, while Canadian inventory levels are down a whopping 18.7 percent compared with the same month the prior year.

Automotive remains the primary success story for the aluminum market, due to both the overall strength of the industry and the continued market share gains of nonferrous metals. Automotive production is once again expected to increase this year, topping out at more than 17 million vehicles. While the rate of growth in automotive is clearly plateauing, the average age of the fleet on North America’s roads, at more than 12 years, ensures abundant future replacement demand.

Alcoa forecasts 1-4 percent growth in the automotive aluminum market in 2016.
Of course, the bigger story is aluminum’s gains in the content of the average vehicle. Aluminum has displaced steel in many part applications as carmakers work to reduce weight and improve gas mileage by the government-mandated date of 2025. Veteran aluminum industry analyst Lloyd O’Carroll says the trend toward greater aluminum content in cars and trucks is showing no signs of abating.

Two years ago, Ford made history with the conversion of its popular F-150 pickup truck to an all-aluminum body. Now it’s looking to move its 250 and 350 Super Duty series vehicles in the same direction. Other automakers, such as GM, are also aggressively switching to aluminum sheet for enclosures such as hoods, doors and lift gates.

“While there are reports from automotive industry experts claiming steel and aluminum will continue to dominate vehicle structures and chassis systems beyond the 2025 timeframe, it is a more favorable environment for additional aluminum growth as a percent of the vehicle structure,” says Guy Charpentier, marketing manager for Bonnell Aluminum, Newnan, Ga. He cites Aluminum Association data that shows North American nonferrous shipments for passenger cars and light trucks, including extruded shapes, rod and bar, and pipe and tube, increased 13 percent annually between 2013 and 2015. “To us, this confirms that the conversion to lighter materials such as aluminum is progressing as planned.”

“The big question is how big is automotive going to get?” says O’Carroll, senior analyst for aluminum at CRU. “I was in Detroit a couple of weeks ago, and there are concerns about the capital projects that need to get done to add more capacity.”

Aluminum producers are investing heavily to overcome the capacity constraints that could limit their ability to meet the coming demand for automotive alloys. Alcoa and Novelis have completed major upgrades to existing facilities to handle autobody sheet needs, and Aleris is in the middle of upgrading heat-treat and finishing lines at its Lewisport, Ky., facility. Just this year, Bonnell announced plans to invest $18 million at Niles, Mich., to expand an aluminum extrusion line to serve automotive. Later, Constellium revealed its plan to build a new automotive components facility in San Luis, Potosi, Mexico.

Alcoa is continuing with its development of a Micromill in Texas designed to produce a new generation of aluminum alloys. The end product will be stronger and more formable than conventional aluminum, the company claims, addressing shortfalls of the nonferrous material for automotive use.

In some cases, the aluminum industry’s focus on serving the auto market comes at the expense of its can sheet business. Can sheet is not a high-margin business to begin with, and it has lost ground in recent years as consumers move away from carbonated beverages. However, can sheet’s fortunes have picked up with the development of new laser marking of the skins, creating a host of marketing opportunities for beverage makers. The design options have prompted greater use of cans by craft breweries, and an uptick in aluminum bottle production by major beer makers such as Anheuser Busch.

Some metals executives fear that aluminum makers’ focus on the auto business will take a toll on production of the traditional common alloy products that service centers buy. “They are enamored with automotive, and they have devoted a lot of capital investment related to that particular market,” says Mike Palesny, vice president of Petersen Aluminum, Elk Grove Village, Ill., which specializes in architectural aluminum products. “Fortunately, they have not abandoned the particular segment we’re in, which is a little more value-add for the mills.”

O’Carroll says other aluminum buyers are going to have no choice but to look elsewhere for some of their material needs. He cites Aleris’ Lewisport, Ky., mill as a prime example of how distributors may feel the supply pinch. “That’s one of the major producers of 5052 for service centers, and I would think service centers are trying to figure out how they’re going to replace that volume. Lewisport will still produce 5052, it will just be a lot less,” he says.

The answer to the question is obvious to some. “I think as the domestics focus intently on auto body sheet, common alloys will be moving more and more to import, which is good for us,” says Nathan Kahn, president and CEO of Empire Resources, Fort Lee, N.J., which specializes in supplying foreign product.

China will undoubtedly be seen as a source of supply, given its outsized role in the market already. Fortunately, Kahn says, Chinese producers seem to be acting more prudently. “They’ve stopped being kamikaze players and started being more stable. I wouldn’t call them responsible players, but they’ve backed away from being irresponsible players.”

Auto, of course, is only one market for aluminum products. None of the others are performing quite as well, though there remains strength in building, construction and aerospace. Energy and truck/trailer are considerably weaker.

Palesny, whose company sells about 75 percent of its material into the commercial construction market, has been delighted with its results in 2016. “It has been a very healthy market segment for the entire year, and we’re looking at good things in 2017. I think the market is up, and our market percentage, while modest, is up as well,” he says.

Greg Weekes, president of Eastern Metal Supply, Lake Worth, Fla., says his company is also experiencing a good year. His only problem is getting enough material from his preferred mill, which sells a lot into the building and construction markets in the Southeast where EMS does most of its business. “The housing market is booming in Florida, with apartments, condos and high-rises. There’s a lot of permitting being done. We’ve got this market for another 2-3 years,” Weekes says.

Bonnell’s Charpentier offers similar observations, noting the company’s building and construction business is a key reason for its 4.8 percent growth in shipments this year.

The aerospace industry remains on a multi-year upturn, though not without some complications. Major aircraft makers Boeing and Airbus are completing some model changeovers, which has the effect of slowing production. That has caused an oversupply of materials in the already complicated aerospace supply chain, leading to some destocking and fewer new aluminum orders. “There was a big inventory buildup, so now we’re having a correction. It’s flat to down slightly, but we expect a substantial rebound in 2017 and beyond,” says O’Carroll.

That outlook is consistent with Alcoa’s forecasts. Its shipments to the aircraft industry declined 1 percent in the first half, but are expected to rebound over the final six months. Additionally, the company anticipates more than 10 percent growth in 2017, suggesting the inventory correction will be short-lived. “We do see a very robust commercial jet order book over nine years of production,” President Klaus Kleinfeld said during the company’s quarterly conference call.

Aluminum shipments for other industrial applications are flat to down slightly, a prime reason for the shipment decline reported by MSCI. Notably, the truck/trailer market is down considerably in the U.S., with Alcoa anticipating declines of more than 20 percent.

O’Carroll says the truck market has been damaged by regulatory changes, an inventory overhang, the softness in the energy sector and a shortfall of qualified drivers. He predicts the double-digit declines this year will be followed by more contraction and a bottoming out in 2017.

One factor the supply chain has not had to deal with in 2016 is the pricing roller coaster that has plagued previous years. Following a late decline at the end of 2015, prices have held fairly steady this year. Aluminum is currently trading around $1,560 per metric ton.

“We’re in a fairly good place. Demand is OK and pricing is OK. That’s kind of where we are,” Kahn says.

“The LME price has been trading within a pretty tight range all year,” says Palesny. “That’s OK with us. What we saw last year was a real plunge in pricing. That’s difficult to manage when you have a large inventory suddenly worth 25 percent less.”

Industry players are keeping an eye on other developments. Alcoa remains on track to separate its company into two separate businesses, with the newly renamed Arconic becoming the supplier to service centers and other end-use markets. And in August, aluminum rolling mill Aleris announced it was being acquired by Zhongwang USA, a subsidiary of China’s Zhongwang. The planned acquisition drew immediate concern from the U.S.-based Aluminum Extruders Council, which claims the parent company is a violator of global trade regulations.

Aleris insists the new ownership will not alter its place in the domestic supply chain. “We are committed, as we have been for over 50 years, to the service centers.  While the products and type of business may change, our commitment to this key customer base will remain strong,” says Jason Saragian, director of communications for Aleris.

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