By Dan Markham
on Nov 20, 2019
While other segments of the industrial economy have experienced a bumpy 2019, the aluminum supply chain has largely enjoyed a less painful run. Industry players don’t expect major changes to that dynamic for the remainder of the year and into 2021.
The industry’s numbers tell a pretty comfortable, though not scintillating story. Global demand of aluminum flat-rolled products is expected to grow 3 percent this year. U.S. shipments from producers are down modestly from the strong 2018, according to the Aluminum Association. And even with some destocking, U.S. shipments from service centers are down only slightly through the first eight months of the year, showing far more resiliency than steel products.
The pricing story is more of a mixed bag. “The LME has been stable for several months, but the conversion costs have fallen dramatically,” says Jeff Haas, president of Cleveland Metal Exchange.
How the industry is faring depends largely on the markets being served. The transportation sector, one of the biggest and getting better, continues to provide positive momentum.
Though light vehicle production is expected to be down 3.5 percent this year to 10,702 vehicles, the material continues to make inroads as a percentage of the vehicle, overcoming much, if not all, of the slight downturn. Moreover, production and sales are still at historically high numbers, and the American consumer continues to shift to larger vehicles, light trucks or SUVs, which have more metal content than passenger cars.
“Production figures from the automotive industry, combined with increasing aluminum content in cars, result in growing demand for auto body sheet, even in years of stagnation of car production. The market expects an annual growth rate for auto body sheet in the range of 10-12 percent in the upcoming years,” says Leopold Pöcksteiner, Head-Strategy, Communications and Marketing at AMAG Austria Metall AG, which has been growing its presence in the United States.
That sentiment was echoed by Arconic Chairman and CEO John Plant during the company’s recent conference call. “I think the secular trend of lightweighting is certainly going to be a feature in the automotive market for the next decade. An average is somewhere between 6 and 9 percent conversion an annual basis. On the normal order cycle that should be enough to overcome auto cyclicality.”
On the construction side, which is the major end market for Petersen Aluminum, the market has held up pretty well, says Mike Weis, the Southeast regional manager based in the company’s Acworth, Ga., facility.
“The year has been pretty consistent for us. For us down here in the Southeast, specifically, it’s been good for quite a few years. It’s tough to keep that pace of growth up, but we’ve been pretty pleased with 2019 so far.”
There are some darkening clouds, however. According to the Institute for Supply Management, the manufacturing sector contracted in August for the first time in three years. And that dip in the industrial economy is not sparing the aluminum market, says Jeff Haas, president of Cleveland Metal Exchange.
His company, which serves as an importer of record for the domestic supply chain, has seen some end-use customers begin to show some ill effects from the downturn in the manufacturing sector. Several of his customers expressed forecasts of fourth-quarter sales down 20-25 percent.
“The market is flat right now. The overstocking is still very real,” says Haas, whose company expanded its aluminum offerings last year as a response to the Section 232 tariffs, which were more problematic for the stainless steels CME historically specialized in.
AMAG’s Pöcksteiner agrees. “The demand from general engineering is soft in 2019 due to destocking, but some segments, such as semiconductor is expecting to pick-up in 2020.”
Haas says many in the industry overreacted to the double-hit of trade actions in 2018 – the imposition of Section 232 tariffs followed quickly by the antidumping ruling on Chinese common alloy products, creating the inventory overhang. That has mostly passed. “The panic buying is 99 percent out of the market at this point in time,” he said.
Weis agrees. “From a sourcing standpoint, last year was quite the interesting ride. This year it seems to have stabilized and become a more traditional supply market for us.”
While the next 6-9 months may present some headaches given the slowdown in the industrial economy, most industry observers are bullish about the material’s prospects over the longer haul.
“We have some short-term issues, but for the most part we’ll see demand continue to increase in the long term, due to global urbanization and electrification, growth from emerging technologies such as electric vehicles, renewable energy, additive manufacturing, battery manufacturing and new packaging,” said Joe Govreau, vice president for research – metals and minerals for Industrial Info, at last month’s Aluminum USA Conference in Nashville, Tenn. He noted that makers of bottled water have started to shift to aluminum cans and away from plastic.
The industry’s spending supports this optimism, Govreau noted. The global industry has more than $65 billion in projects planned between now and the end of 2020, with the U.S. and Canada slated for more than $3.5 billion worth. Even if only 30 percent of the projects reach the construction phase, as is typical, that still accounts for a healthy amount of expansion in the industry.
In North America, the projects tend to be downstream, involving rolling mills and foundries. Much of that is tied to the automotive industry. The domestic production industry has been investing heavily in autobody sheet production operations. Arconic has spent billions in facilities in Tennessee and Iowa. Novelis is constructing a 200,000-ton aluminum sheet facility in Kentucky, the same location where Aleris previously opened an auto sheet facility.
Those investments are being made because aluminum’s gains in automotive are not expected to end, even with the ongoing challenge by the Trump Administration to roll back some fuel mileage standards for new automobiles the industry had been working under previously.
“Lightweighting in automotive is one of the key drivers for the demand in flat-rolled products. With the increasing share of electric vehicles, this trend will most likely gain momentum with applications for automotive sheet in the powertrain and for energy storage. In our area of business, we see growth of demand in almost all sectors but with increasing competition especially from China,” Pöcksteiner says.
However, that could be a double-edged sword. One of the major concerns for the U.S. distribution industry is getting lost in the automotive shuffle. The worry, which is not completely removed, was that the common alloy sheet that distributors stock will become less of a priority for the domestic producers. Thus far, that fear has not been realized.
“We’re pretty heavy in the common alloy side of things. As automotive has caught fire and mills have added capacity, we’ve wondered what that would do to the common alloy market,” said Weis. “We are encouraged to see some of the mills are making investments on the common alloy side.”
In some cases, it could be the packaging market, which does not typically go through distribution, that suffers. Arconic has been transitioning a Tennessee facility out of packaging into more profitable industrial products.
But there are issues. Aleris Chairman Sean Stack, during the company’s most recent conference call, noted how the producer’s volumes to the North American distribution market were down 39 percent in the second quarter, partially attributable to a shift to more automotive products at its Lewisport, Ky., facility.
“Our sales to our distribution customer base have been and will continue to be impacted by our mix shift and ongoing ramp-up of automotive volumes in Lewisport,” Stack told investors and analysts. “But as we continue to increase the efficiency and quality of our automotive body sheet, we expect Lewisport to be able to provide more material for the distribution customer base in the upcoming quarters.”
Aleris and Novelis are still on target to complete the merger of the two rolling mills by year’s end, though the deal must first pass through mediation based on a recent challenge from the U.S. Department of Justice. Though the antitrust probe is based on the car makers’ ability to source rolled aluminum sheet for auto applications, the distribution industry is obviously going to be paying close attention to the fate of the transaction and how the supply chain shakes out once it’s gone through.