Short-Term Questions, Long-Term Optimism
By Dan Markham, Senior Editor
Growing use of aluminum by automakers and other industries points to a positive future for the lightweight material, despite the current economic uncertainty.
“Growth is going to be approximately flat-lined unless you’re in a few specific markets,” said aluminum analyst Lloyd O’Carroll at last month’s Aluminum Association/Aluminum Extruders Council joint meeting in Chicago. “We should be less optimistic than we were six months ago.”
But O’Carroll joins other economists and industry watchers in his belief that the nation, and industries such as aluminum, are not headed into another downturn.
“I think a new recession is relatively unlikely. Classic recessions are always caused by tight money or imbalances (too much inventory, too much housing, too much optimism). None of those conditions exist today. We think a new recession is not likely in the near term, but subpar growth will remain,” said O’Carroll of Davenport & Co., Richmond, Va., and author of the O’Carroll Aluminum Bulletin.
O’Carroll’s view represents the consensus among members of the supply chain, who are frustrated by the country’s slow rebound from recession, but still see the direction as positive.
“Business is pretty much OK,” says Bill Sales, senior vice president of nonferrous operations for Reliance Steel & Aluminum, Los Angeles. “What we’ve seen of late is that the growth rate has slowed. The economists expect that to continue through the end of the year, with some pickup in 2012.”
Keith Harvey, vice president of sales and marketing for Kaiser Aluminum, Foothill Ranch, Calif., says the last two post-recession years started out well for his company, but lost momentum in the second half. Nonetheless, Kaiser’s shipments grew 15 percent in 2010 and are up nearly 20 percent so far this year, although Harvey expects the 2011 growth rate to moderate as the year winds down.
The economic uncertainty is the biggest impediment to otherwise healthy business activity in most of aluminum’s major markets, agree most executives. “Our customers are unsure about what’s going to happen in the next four to six months. They may have a job today, but they don’t know what’s going to happen tomorrow,” says Greg Weekes, vice president of Eastern Metal Supply, Lake Worth, Fla.
The uncertainty is even reflected in the recent downtrend in the aluminum equity market. “There is a difference in what we are observing between trends in exchange-traded commodities and non-exchange traded commodities, which is an indication of what’s really happening on Main Street,” says Timothy Hayes, O’Carroll’s colleague at Davenport & Co. “When you look at non-exchange traded commodities, such as iron ore and scrap, they’ve continued to hold firm or creep higher since the end of June. In our view, the non-exchange traded commodities give you a better read on the true fundamentals because they’re not impacted by speculative buying.”
For producers and distributors, those fundamentals remain fairly solid in most of the material’s major end markets—save one. Construction, one of the “Three Cs” along with cans and cars, continues to be a major drag on economic recovery.
“It all goes back to the housing market,” says Parks Dodd, president of Aluminomics, Roswell, Ga. “That’s probably what the government should be doing, providing aid to the housing market instead of the other things they’re pushing.”
The lack of new-home construction has hurt retail and commercial construction, as well. “Housing can’t seem to come off its bottom, and most of the nonresidential markets follow residential,” Hayes says. On top of that, he adds, aluminum remains vulnerable to competition from other materials such as vinyl siding.
In the transportation markets, it’s aluminum that is encroaching on other materials’ turf. The lightweight metal continues to win share from steel in the automotive and truck/trailer sectors. “Transportation has been a bright star and has managed to grow handsomely over prior year’s numbers,” says Thomas Brackman, president of Lincolnshire, Ill.-based Nichols Aluminum and chairman of the Aluminum Association.
Aluminum industry sales to automotive manufacturers climbed 11 percent in 2010 and are expected to grow an additional 8 percent in 2011. North American light vehicle production could reach 13 million units this year, a substantial recovery from less than 9 million vehicles during the recession, but still well below the industry’s 17-million-unit peak. Likewise, the truck/trailer market enjoyed a big uptick in 2011, though off significant lows.
Just as important, aluminum is winning a larger share of each vehicle produced. In its recent report, Ducker Worldwide estimates the average North American vehicle will contain 343 pounds of aluminum in 2012, up from 327 pounds just three years earlier. Aluminum is expected to double its share of the average light vehicle mix to 16 percent by 2025, compared to its 2008 base year.
In the past, automotive aluminum was typically confined to non-structural components such as wheels, transmissions and cylinder blocks, using secondary aluminum products. Future growth will be driven by primary aluminum’s use in hoods, trunks and doors, Ducker predicts. Trend reports suggest a minimum 41 percent share in hoods by 2017 and 53 percent by 2025.
The reasons behind future market share gains are obvious. With new, stricter government standards demanding better fuel efficiency, automotive companies are looking to take weight out of the vehicle in every possible location. This is driving the substitution of aluminum for steel, a trend the steel industry is trying to counter through the development of advanced high-strength steels.
But the aluminum industry is convinced the shift toward its material is inevitable. “Since I’ve been driving, gas prices have only gone one direction,” says Kevin Lowery, director of communications for New York-based Alcoa’s Global Rolled Products division. “Consumers are looking for cars to be more fuel efficient, and OEMS are under pressure to make their cars more fuel efficient under the new CAFE standards. When you have those forces coming together, the quickest and most economical way to make that happen is to put more aluminum in the car.”
The movement toward aluminum does not have to result in increased costs, claims Lowery, despite the material’s higher price tag compared to steel. “Lightweighting the car in aluminum serves as a cost-savings enabler. If you’ve got a lighter car, you can put in a V-6 instead of a V-8 engine and get the same kind of performance with a smaller drive train. There is huge savings in that.”
Kevin Moore, manager of secondary aluminum purchasing at General Motors, addressed the Aluminum Association’s Aluminum Week meeting to discuss the material’s prospects in automotive. While overwhelmingly bullish on aluminum’s potential applications, he expressed concerns about the domestic aluminum industry’s ability to handle automakers’ increasing requirements. Industry leaders believe such fears are unfounded.
“The supply chain for aluminum, whether that’s primary or scrap-based, is well resourced,” says Brackman. “If you look at association data, we’re underutilized on installed capacity. We can assure any customer who wants any volume of aluminum that the supply chain is firm.”
“If there’s an attractive opportunity, we’re not shy about putting up capacity. It’s a very competitive industry and very diversified from the supply base,” adds Jean-Marc Germain, president of Novelis North America and vice chairman of the Aluminum Association.
Almost as if on cue, Alcoa proved Germain’s contention. One day after Moore’s remarks, the aluminum giant announced its plans to invest $300 million in its Davenport, Iowa, facility to meet increased demand from the automotive industry. The expansion is expected to be completed by the end of 2013.
Alcoa’s announcement follows other expansions by major North American aluminum mills to increase rolling capacity. In July, Novelis reported plans for a $200 million expansion of its rolling operations in Oswego, N.Y., to meet increasing demand for aluminum sheet by the automotive industry. The project, to be completed by summer 2013, will add 200 kilotons of production, which is five times the company’s North American capacity for automotive sheet.
In August, Kaiser Aluminum announced plans to further expand heat-treat plate capacity at its Trentwood rolling mill in Spokane, Wash. The $21 million investment is expected to debottleneck its processing centers and increase its capacity to produce heat treat plate for the aerospace industry by 5 percent. It, too, will come on stream in 2013.
Aleris, Beachwood, Ohio, also will invest $70 million to install a new cold-rolling mill in its Duffel, Belgium, facility, to meet increasing orders for wide automotive body sheet.
In addition to automotive, demand for aluminum in other end markets is also trending up, as U.S. industrial production continues to recover. Helping is the weak dollar, which has opened up export opportunities. “We’re starting to export more,” Hayes says, “and the industrial equipment sector is really benefiting.”
On top of that, Harvey says, the industry is seeing an increasing number of companies returning to North America after relocating to China and other low-wage markets because the perceived cost savings are not materializing. “We have a lot of customers saying they’re seeing subcontractors come back from China. They may be going to Mexico, but it’s still an improvement.”
Spending on capital goods was strong in the first half but slowed in the third quarter, noted Dodd. He expects it to pick up in the fourth quarter as companies seek to capitalize on favorable depreciation rules set to expire next year.
Likewise, the consumer electronics market has slowed a bit, though industry watchers believe that is temporary. “We think it’s going to stay down the balance of this year, but most of the forecasts have it recovering in the second quarter of next year,” says Sales at Reliance.
Some of the same attributes driving aluminum purchases for automotive applications will serve the material well as it tries to gain share in the electronics market. “People want cool, they want thin and they want light,” Lowery says.
“Aluminum use in laptops and tablets is exploding.”
Aluminum trades around $2,000 per ton today, nearly three times more than hot-rolled steel at about $700 a ton. But economist Robert Genetski, speaking at the Aluminum Association event, put that price disadvantage into perspective. Over the past 10 years, aluminum’s price has risen 40 percent—only about half that of other commodities—so the gap is narrowing. “In addition to the intrinsic advantages of aluminum, the cost side of the equation is getting better as time passes and is another reason to be optimistic,” he told the aluminum executives.
Eastern Supply’s Weekes has seen aluminum gain ground against both stainless and galvanized material. “Galvanized prices have gone up dramatically over the past few years, so a lot of people have come back to aluminum,” he says.
All of these trends suggest that aluminum is definitely a growth industry. “We’re very positive about the future,” says Germain at Novelis, “but don’t ask me about a forecast for the next month.”
Aluminum Association Puts Data Behind Sustainability Story
For years, the aluminum industry has been touting its product’s recyclability and other sustainable features. Now it has the data to back up its boasts.
During last month’s Aluminum Association Aluminum Week event in Chicago, the trade group released the results of its study on aluminum’s benefits. Aluminum: The Element of Sustainability is a comprehensive report covering the material’s improvements over the past 20 years.
“We needed to be better than our competitors in telling our story. We needed to build that database to allow us to tell that story credibly over the long haul,” says Steve Williamson of Tri-Arrows Aluminum and a member of the Arlington, Va.-based Aluminum Association’s Sustainability Committee. The report covers seven aspects of the material’s sustainability: strength, durability, flex-ibility, impermeability, low weight, corrosion resistance and, of course, re-cyclability.
The idea for the report was triggered by Wal-Mart’s packaging scorecard introduced in 2006. But the association quickly recognized the benefits for the material as a whole. While the aluminum can is iconic for its recyclability, the industry has also improved the material’s environmental attributes in other areas.
The report notes that energy demand for primary aluminum production has declined 17 percent since 1991, while energy demand for secondary production has fallen 58 percent. Similarly, greenhouse gas emissions caused by primary production have dropped 72 percent in the past 20 years, while emissions from secondary production have declined 65 percent.
Additionally, aluminum’s benefit to fuel efficiency in automotive and light truck applications alone nearly neutralize the environmental impacts associated with the industry’s primary production activities, the study found. “Lightweighting” vehicles with aluminum in 2009 offset 90 percent of the energy consumption and 96 percent of the greenhouse gas emissions associated with primary aluminum production.
While sustainability concerns are driving decisions in packaging and automotive, the material’s sustainability traits can be leveraged in every industry, officials says. “Pretty much everybody is interested in certain aspects of sustainability, regardless of what market they’re in, including the industrial products market,” says Kevin Lowery, director of communications for Alcoa’s Global Rolled Products division. “People are looking for a product that will bring environmental benefits to their process.”
The report is based on both government data and information from several aluminum groups, including the Aluminum Association, the International Aluminium Institute and the European Aluminium Association. All of that data has been made available in the report, including proprietary figures, setting the aluminum industry apart from other trade groups.
“We decided we should be transparent and challenge other industries to do the same,” says Steve Gardner, director of communications for AA and a chief architect of the report. “In forums where we’ve been on with plastics or glass, it’s a great feeling to be able to say, ‘Our data is out there, where’s yours?’”
The association believes the report will benefit the industry in numerous ways. “Now we’ve got a very good defense based on the data we have. We can respond to challenges that come from competing materials. We can respond to inquiries from regulators and legislators regarding our products and processes. We can now go on the offense and take our story to the marketplace,” Williamson says.
The full report is expected to be available for download on the association’s website, www.aluminum.org, this month.