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10-2010 Aluminum Market Outlook
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Megatrending in the Right Direction
 
By Dan Markham, Senior Editor

After hitting rock bottom in 2009, demand for aluminum products has been on a steady climb across all end markets.

Members of the aluminum supply chain are unanimous in their appraisal of 2010 as a much better year than the one that preceded it. But that is the very definition of faint praise.

“We’ve seen improvements in our business on all fronts. All of our locations have improved over the past 12 months, and activity is up in all our various segments,” says Robert Stiles, chief operating officer of Erickson Metals Corp., Cheshire, Conn. “Prior to that, we were about as slow as we’ve been in the last 20 years.”

Conversely, the long-term prognosis for aluminum is quite good. With the increased urbanization of the world, the growing interest in lightweighting for fuel efficiency in transportation, and sustainability concerns in all segments of society, the material’s outlook is fairly secure. Global aluminum consumption is 39 million metric tons today, but is projected to double within 10 years.

“All of the megatrends going on speak well for aluminum,” says Kevin Lowery, a spokesman for aluminum giant Alcoa in New York.

At the moment, however, producers and distributors describe growth in the North American aluminum market as comprehensive but gradual.

“We’re seeing things continue to improve, and 2010 is definitely better than 2009,” says Bill Sales, senior vice president for nonferrous operations at Reliance Steel and Aluminum Co. in Los Angeles. “The strength on the aluminum side is really across all product lines. There’s improvement in rod and bar, improvement in common alloy sheet, even heat-treat sheet and plate.”

The improving conditions can be seen in the monthly numbers from the Metals Service Center Institute, Rolling Meadows, Ill. Shipments of aluminum products from domestic service centers were up 47.6 percent in July, continuing a year-long trend of increases. For the year to date, service centers have shipped almost 23 percent more material in 2010 than they did last year.

While the overall market has been better, the individual end markets tell a slightly different story. Gains in the transportation and industrial markets have driven the overall demand increase, while packaging and building and construction have remained fairly flat, analysts say.

The heavy truck gains are exaggerated by the depressing depths the market reached in 2009, says Alan Dick, president of Rolled Products North America for Aleris, Beachwood, Ohio. “The most robust of markets we’re involved in is truck/trailer. But it was the lowest of the low. The improvement seems much more pronounced than it might have if it hadn’t reached such lows.”

Timothy Hayes, an analyst with Equity Research, publishers of the Davenport Monthly Aluminum Update, says shipments in the heavy truck and trailers segments could enjoy a 20 percent increase this year from 2009. Such big increases are not surprising, given the up-and-down nature of that market. “These markets are notoriously cyclical, with huge swings. They’re having their typical big bounce from depressed levels,” Hayes says.

In addition to better build rates by the equipment manufacturers, aluminum is poised to gain market share as a result of an increasing emphasis on lightweighting, Lowery says. “They are looking to reduce weight for two reasons, to increase fuel efficiencies or to increase payload opportunities. They may be switching out steel wheels for aluminum or lightening the trailer itself. Alcoa expects to see an increase of sales to the truck and trailer market of 10 to 15 percent this year.”

Lightweighting is also driving greater participation in the automobile and light truck segment, which rebounded nicely in 2010 with a forecast for continued growth in 2011. For years, aluminum’s percentage of the weight of new car and truck builds has grown, and tougher CAFE miles-per-gallon standards will only expedite the material’s market share gains.

“The aluminum industry is generally always capturing another few pounds worth of an automobile. They haven’t lost any pounds of an automobile yet,” says Tony Hammes, vice president of aluminum for Ryerson Inc., Chicago.

For service centers serving automotive parts suppliers, the good news goes beyond aluminum’s market share gains. After suffering through a miserable build rate around 9 million units in 2009, vehicle sales are expected to bounce back to 11 or 12 million cars and light trucks by year’s end. “That’s the one area where consumers are buying,” says Hayes. “It won’t grow as fast in 2011, but it will still be up.”

Another major market for aluminum products, the building and construction industry, is not faring quite as well. On the commercial side of the business, the picture isn’t pretty. “We’re seeing significant declines there,” says Alcoa’s Lowery. “We’ll be down 23 to 27 percent in 2010.”

Residential construction, which was nearly brought to a halt when the real estate bubble burst in late 2008, is finally starting to show small signs of renewed activity. Aleris reports surprising strength in its construction sales this year, though it attributes most of that to home remodeling.

Even if housing and auto are poised for an upswing, it is likely to be disappointing from a historical perspective, Hayes says. The next cycle of automobile sales may average 13 to 14 million units, down from 16 to 17 million, while the next upswing in home sales may average only one million, one-third less than the average 1.5 million annual home starts in the previous cycle.

“Normally the next cycle is bigger than the last, since the economy is ever expanding,” he says. “What’s uncharacteristic about this upcoming cycle for the U.S. economy is that some markets—and auto and housing are two that fit the bill—will be below the last cycle. We bought too many homes and too many cars in the last one.”

Aluminum’s other major end market, packaging, is expected to remain fairly flat, though the industry is hopeful recent growth in the use of aluminum bottles will boost consumption. While service centers don’t participate much in the packaging market, mills’ production of packaging can affect the availability of material for other uses, notes Ryerson’s Hammes. “It creates a supplemental effect. When there’s pressure to produce more can product, it hurts their ability to produce other product.”

Distributors report some encouraging signs in other markets. Reliance’s Sales says the company’s semiconductor business exceeds the gradual improvement trend he’s seen in other end markets and has been a big plus for the company.

Stiles of Erickson Metals says his primary facility’s focus on non-standard finish gauge and tempers with the ability to provide smaller quantity with quick delivery has somewhat insulated it from threat. “Our customers are a little more optimistic that they'll stay busy.”

Despite a generally upbeat tone, aluminum suppliers obviously have some worries about the economy and demand going forward. Service centers report that despite better order books, their customers are far more cautious about the future. “Many people don’t have a lot of faith, even in the business they have,” Hammes says.

“Whether you’re talking service centers, the transportation industry or the building and construction industry, they’re all conservative in their approach next year,” says Dick. “But nobody I’ve heard from is telling us we’re about to enter a double-dip recession.”

“The concerns about a double-dip are overblown,” Hayes says, “but there are certainly reasons why one should expect sub-par growth for the U.S. economy. It stems back to consumer buying, not just of the past cycle but of the past several cycles. This is a big hangover from a couple very good expansion periods.”

At September’s Aluminum Week conference, co-sponsored by the Aluminum Extruders Council and the Aluminum Association, Hydro Metals’ Matt Aboud noted the more difficult outlook for consumer-based end markets.

“If you look at all the statistics that are business driven—such as industrial production and the supply managers index—they’re all very good. But if you look at the statistics that are related to the consumer—consumer confidence and housing starts—they’re still bad.

“We have this dichotomy between business looking healthy and consumers looking not quite healthy. That’s an interesting dynamic, and you have to feel it can’t last forever,” Aboud said.

Aluminum prices have held up well, considering the economic conditions. The current LME cash price is around 95 cents per pound. Equity Research anticipates that price will increase modestly in 2011, to an average of about $1.02 per pound. The company’s forecast is based on the expectation that global demand growth will exceed global production growth—the opposite of what occurred the past few years.

Some of the recent price increases were caused by investors betting on the come. “They pushed the price much higher than the current fundamentals would justify. They’re betting on the fundamentals a year from now,” says Hayes.

Such speculation is frustrating to service center executives. “We live in a world where the margins are so thin, even movement on price of a few percent within a given month is tough for us,” says Hammes.  

Stiles agrees that the pricing dynamic can be exasperating. “If the market price is going up because people are investing in the commodity, and not because inventory is down, then we have a problem. It doesn’t make sense by conventional economics, and we have no control over that.”

The mills do have some control over the supply side of the equation, and tight availability is helping keep the price stable. Production at Alcoa’s Texarkana rolling mill was idled in the summer of 2009 and has yet to be restarted.

“Overall the demand numbers don’t compare to where we’ve been historically, but a lot of capacity has been pulled out of the system, so that has strengthened the pricing side of the equation,” says Sales. 

Unlike with some other metals, there are no major plans to increase capacity in the United States. “Most companies are thinking if they’re going to put capital in, they will put it in emerging economies where there is high growth and they’re close to that demand. There would have to be some very different situations and some factors changing for companies to put capital aggressively in the U.S., from an expansion standpoint. The growth is all coming outside the U.S. and Europe,” Aleris Chairman and CEO Steve Demetriou said at the Aluminum Week meeting.

One exception is the recently completed Kaiser Kalamazoo facility, a $100 million investment. The plant will be the California company’s primary site for manufacturing its Kaiser Select rod and bar product.

At the moment, Hammes says availability is a major issue for the industry, “with the domestic mills incapable of supporting the order books from distributors or OEMs all the way through the supply chain.” Moreover, the tightness in the market is leading more and more distributors to look at imports as a source of material. Despite decent spreads between domestic and import offerings, Hammes doubts the common alloy makers will follow the lead of the extrusion industry and file a countervailing case because “they can’t provide the pounds.”

Last month, the Department of Commerce reached a preliminary determination that aluminum extrusion imports from China were being unfairly subsidized. Countervailing duties from 6.18 to 137.65 percent may be applied to imports to offset the subsidies.

  
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Tuesday, November 25, 2014