Aluminum Outpaces the Economy
Though they expect GDP growth to slow in 2013, Aluminum Week speakers offered plenty of reasons for nonferrous suppliers to be optimistic about the years to come.
By Dan Markham, Senior Editor
Executives who gathered for Aluminum Week were greeted by some rather depressing news on the macroeconomic front, though the prognosis for their materials is considerably brighter. Members of the Aluminum Association, Aluminum Extruders Council and Aluminum Anodizers Council met last month in Chicago for the annual conference.
Chad Moutray, chief economist for the National Association of Manufacturers, told attendees to expect GDP growth below 2.0 percent in 2013, and that’s only if the much-discussed fiscal cliff is avoided. Others shared that pessimistic outlook for the economy.
But the news was not all bad for markets that aluminum serves. Aluminum’s market share grab in automotive continues unabated, executives reported. And the housing market, moribund for several years, is showing signs of life, as well. During the event, the Commerce Department released September housing start figures that showed the seasonally adjusted annual rate had jumped to 870,000 units, an increase of 15 percent to its highest level in four years.
Aluminum and steel have been in a long-running battle for share in the automotive market, a fight that has picked up steam since the official enactment of new CAFE standards for fuel efficiency earlier this year. But Alcoa’s Marketing Director Randall Scheps, who serves as chairman of the Aluminum Association’s Auto Transportation Group, said there’s little need for the material’s backers to engage in any back-and-forth with steel’s supporters.
“We think, strictly based on the technical merits, aluminum is going to win a lot of these arguments. The steel guys are just being aggressive, trying to hang on to the markets they have today,” Scheps said. “But the fact is the automakers need to save big chunks of weight, and steel is not going to get them there.”
Scheps also dismisses the threat advanced high-strength steels pose to aluminum’s expected gains. Higher strength steels already account for 60-70 percent of the steels used in auto production.
“Based on state-of-the-art design today, you can go with steel and save an additional 11 percent of the weight of the body of the car. But if you go to aluminum, you can save 40 percent in weight,” he said. “There’s a lot of high-strength steel on the road, but to get to the 2025 standard, [carmakers are] going to have to do something beyond steel.”
Earlier in the month, at the Steel Market Update steel conference in Chicago, analyst John Anton of IHS Global Insight suggested that aluminum’s inroads into the automotive market could be constrained by supply. But Scheps dismissed those fears, too, claiming that with bauxite and alumina, “there are no availability concerns.”
The industry will face challenges on another front, however. “We have to get the rolling capacity in place in time to meet demands, especially if the carmaker wants to do a big program that requires a lot of sheet material.” He estimated it might take 2½ years to increase the rolling capacity to meet demand, a process that’s ongoing both here and around the globe. “It’s not a technical constraint. It’s not a material constraint. We have to partner with the carmakers early to make sure we’re ready.”
Additionally, he said, the aluminum supply chain must not be content with the projections for its materials. It will be required to improve its alloys and their functions to meet ever-changing demands from the automakers.
For instance, he said, European carmakers will require more recycled content to communicate their life-cycle concerns to customers. European concerns also are driving the aluminum industry to develop more “pedestrian-impact friendly” materials, to make the car less dangerous in low-speed accidents involving pedestrians.
The news on September home starts underscored what many others in the industry had noticed throughout 2012, that residential construction was finally pulling itself off the floor. That didn’t surprise Davenport & Co. Vice President Timothy Hayes, a metals equity analyst and editor of the O’Carroll Aluminum Bulletin.
“The long-term demographics support housing starts at 1.4 million units. A year ago when we put up that forecast, I can’t tell you how much pushback we got. With the new housing data, all of a sudden it becomes more plausible to get to a million starts,” he said.
Most of the fundamentals are strong for the housing market, including higher household formation rates, increasing home prices, improving sales of existing homes and low interest rates. Only a low home-ownership rate, now at a 17-year low, acts as a headwind.
Altogether, Hayes expects housing to grow 23 percent to 750,000 units this year, then another 27 percent to 950,000 units in 2013.
The story isn’t nearly as promising in nonresidential construction. Though activity climbed 10 percent this year, most experts expect a flat 2013. Hayes said manufacturing and utilities drove this year’s higher numbers, and both are likely to experience slowdowns next year.
While Hayes addressed the numbers, Ujjval Vyas, principal at consulting firm Alberti Group LLC, spoke of aluminum’s place in a rapidly changing construction industry. He stepped back into the past to note how the industry failed to capitalize on a previous opportunity.
In the 1950s, Reynolds published a two-volume set, Aluminum in Modern Architecture, highlighting all of its potential uses to the building, design and construction set. But that revolution never took place, and aluminum instead became a commodity to be pulled off the shelves rather than an innovative solution to many problems.
Having settled into that niche, it was difficult for aluminum to escape, given how slowly the building industry has been to change, Vyas said. Now, however, that attitude is shifting. The industry is being forced to become more efficient and more open to innovation. This opens the door, once again, to aluminum. “I think aluminum and aluminum extrusions, are extremely innovative materials and can have a very powerful future in the building and construction industry,” he said.
Vyas cited aluminum foam and transparent aluminum as examples of two technologies that could be used extensively by the building sector. Key players such as building owners, material specifiers and even insurance companies, must be engaged by the aluminum industry to make them understand the full capabilities aluminum can deliver.
“You need to understand the market, so you are helping them to solve their problems. You can’t be passive in an innovative market,” he said.
Hayes, speaking to the AEC, delivered a forecast for the next three years for the eight leading domestic end markets for aluminum extrusions, comparing the coming years to the material’s previous peak in 2006.
The biggest disappointment for extrusions has been one of the biggest markets, residential windows. The downturn in residential construction and remodeling, coupled with material substitution, has seriously damaged the market. Even with expected growth in housing in the coming years, the use of extrusions in residential windows is expected to be more than 60 percent off its peak.
The story is not as painful for nonresidential windows. Though that market also has tumbled, the substitution effect isn’t as pronounced. While the nonresidential window market will still be 11 percent below its peak in 2015, it will become almost equal in size to the residential windows market.
Other markets have brighter outlooks. Curtain wall use is already up this year and will top its peak by 2015. Truck/trailer use will pass its 2006 peak by next year, Hayes said, though it won’t reach the all-time peak set in 1999.
The strongest market, not surprisingly, is automotive. It will eclipse its peak this year, with 13 percent growth forecast annually through 2015. The electrical market is also performing well, having regained the ground it lost since 2006. By 2015, it will be up 40 percent from nine years earlier, Hayes said.
Two other aluminum extrusion markets have demonstrated less strength. The consumer market has shown some of the slowest growth, and will only reach 17 percent of its prior peak by 2006. Machinery has been better, but will remain about 6 percent off its prior high in 2015.
Exports of extrusions have been strong performers in recent years, Hayes said, taking advantage of the cheaper dollar and emerging economies. Though growth has slowed, the export market is expected to get back to its peak by 2015.
Overall, the use of extrusions is forecast to grow 5-8 percent annually, reaching 4.3 million pounds by 2015. That is still down 4 percent from 2006’s previous high, however.
“But if you look at it glass half-full, we’re up 62 percent from the trough,” Hayes said.