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Aluminum Outlook

In the Pink

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MCN Editor Dan Markham Demand strength in almost all markets has created a material crunch in the nonferrous metals segment.

The secret to selling any type of aluminum product at the moment is to have it. 

A combination of numerous factors have contributed to what observers are describing as the best conditions for aluminum sales in many years. 

“Usually, it’s a buyer’s market and it’s price, price, price. But for a change it’s a seller’s market. I’ve been in this business for 38 years, and I would have to go back a long way to see a market situation like we’re seeing now,” says Orlando Ferran, president of San Juan, Puerto Rico-based Almetco. 

Gregory Wittbecker agrees. The analyst for CRU oversaw a panel discussion at the recent Aluminum USA conference in Louisville, and the consensus there was this was a great time to be selling nonferrous products. “By and large, the tone of the sessions was that demand is really outstanding. And there’s no question the sellers have most of the pricing power because of the tightness of capacity.”

The market has responded to the unusual dynamics. “Our customers, who are always price sensitive, this year have just said, ‘OK.’ They understand with metal pricing and supply, it’s about if you can get us the material, we’ll pay and the costs are just passed on and on,” says Ben Belzer, president and COO of TCI Precision Metals, Gardena, Calif.

A number of developments have contributed to the tight conditions, beginning in March with the Commerce Department findings on a common alloy sheet case. Commerce levied dumping duties ranging from 2.75 percent to 242 percent on sheet products from 18 countries, many of them in Europe. The effect is to seriously restrict the flow of foreign product into the U.S. market.

“It’s not dissimilar to 2018 after the Chinese dumping case, but at least then you had the European option available,” says Ryan Adams, national sales manager, aluminum rolled products for Metal Exchange, St. Louis. “Now there is no Plan B.”

Belzer agrees. His company has primarily sourced material domestically, but it’s gone exclusively that way in the current environment. “On the foreign side, with the tariff issue, the price has kind of matched up with domestic, and our customers mostly want domestic.”

On the import front, compounding the antidumping and countervailing duties are the shipping challenges. Shortages have driven the price of a container up three to five times where it was at the beginning of the year, putting an additional premium on the price of foreign material.

“You take those OEs who have primarily only bought domestic materials but who have reached their caps in what the domestic mills  will make available to them and now have to go out and procure foreign material, you feel terrible for them,” Adams says. “You’re paying the domestics $0.65 over the Midwest, and then you’ll pay the equivalent of a dollar over Midwest for import. That’s unheard of, but what are you going to do? You can’t get everything you want domestically.”

In other eras, such rapidly increasing prices, tight capacity and long lead times could also spur a push to other materials, where substitution was a possibility. That’s also not an option in most cases, as the conditions facing the nonferrous industry are mirrored in carbon steel, stainless and other commodity metals. And another potential substitute, plastic, is increasingly falling out of favor in a business culture that’s growing ever more concerned about sustainability and decarbonization. 

With prices at historically high levels, a sudden drop would ordinarily be a major concern throughout the supply chain, but most of the participants don’t envision such a scenario unfolding. “We’re under the assumption, from talking to the mills, that it won’t subside for quite a while. We’re planning on the increases continuing through the end of the year and into early next year,” Belzer says. 

All of this leaves the domestic mills running at or near capacity, particularly on the flat-rolled side. They must just to keep up with strength in most of their end markets, save aerospace. 

“The utilization rates for our industry are very high right now. And for a highly capital-intensive business as the flat-rolled business is, that’s very healthy,” says Mike Keown, CEO of Commonwealth Rolled Products, the Lewisport, Ky.-based rolling mill that formed following the forced divestiture of the facility when Novelis merged with Aleris. “It sets up the supply base to further invest and innovate for our customer base and for our people.”

But those investments won’t be coming anytime soon, even if it’s likely most of the major North American producers have begun kicking around the ideas internally. It takes several years for the announcement of an investment project until the mill is turning out product.

Wittbecker says the producer sentiment at the aluminum conference suggests the mills will only be looking at making investments when they have tonnages committed. 

“It wasn’t like the Field of Dreams model, where we’ll build it and see if we can build demand for it,” he says. “People are willing to invest in the sector, but they want to see the whites of the consumers’ eyes saying they’ll pay for it.”

Adams doesn’t think the capacity crunch will be resolved any time soon. “This is probably a four to five year problem rather than a six-month to one-year problem,” he says. 

Obviously, that problem would be mitigated by a reduction in demand levels. But that’s not likely at all. Several markets are strong and getting better, and the fundamentals are solid for the remaining primary end users. Aerospace is already starting to climb, though it will take a long time to recover from the pandemic. And while consumer demand for automotive is quite good, the well-documented shortages of microchips have curtailed some pull from the automakers. 

But both of those look more like blips in the general upward trajectory. Auto, in particular, continues to be a growth market due to both lightweighting and the newer move to electrified vehicles. 

“I think there’s an expectation the transition to EVs is going to be particularly positive for the sheet and plate segment, and for the extrusion segment. The numbers we’ve run are that net-net, EVs are going to end up consuming an additional 175 pounds of aluminum, even with the loss of castings from traditional internal combustion engines,” Wittbecker says. 

Mike Stier, Hydro North America’s vice president of strategy and finance, agrees. “I think we’re seeing a combination of benefits on EVs. Extrusions have an advantage as far as tooling, as the upfront investment is much lower from a customer application standpoint, and you’re able to get pretty good speed to market in contrast to other applications. And EVs also want to have a more recycling-friendly image.”

Stier notes that 2021 has been an exceedingly strong year in the extrusion space, better than anticipated. “I suspect we’ll be up 12 to 15 percent this year. It’s been a much quicker recovery than we expected.”

Other markets are already robust, and indications are they’ll stay that way. Other transportation markets such as commercial truck and trailer are performing well, while recreational vehicles are in high demand.

“RV sales continue to be red hot, and dealer inventories are very low,” says Adams. He notes the outlook for international travel is low for the foreseeable future, but people still want to travel and have the money to do it. “RVs, campers, pull-behinds – it’s tough to find any of those.”

Building and construction is also performing well, particularly on the residential side. “B&C has been at very strong volumes, as we can see with new housing starts. And we’ll see what impact the hurricanes have, but that always leads to a bump,” he says. 

Ferran can attest to that. Puerto Rico’s series of natural disasters, including devastating hurricanes and an earthquake in back-to-back years, have been driving strong aluminum demand for the past three years. “The island has seen a lot of post-hurricane, post-earthquake money. And if the infrastructure bill goes through, we may see demand for metals hold up for three more years.”

Producer sales to the distribution sector have also been solid, with expectations of even greater strength in the year to come. “My guess is demand will stay robust and we’ll see an increase from the distribution segment heading into and throughout 2022 as depot pounds are going to become increasingly unavailable,” Adams says. “The drawdown is happening quickly, most acutely on light gauge.”

Interestingly, after years of moving production in the direction of aerospace and other higher-margin end markets, a push that concerned service centers they would struggle to find common alloy sheet products, some mills have reversed course recently. At Arconic’s second-quarter conference call, CEO Tim Meyers noted how the company responded to the slowdown in aerospace. “We expect to be ablet to offset most of the impact by pivoting our capacity to capture sheet demand in the strong industrial market,” he said. 

Belzer notes his company enjoyed rather robust sales throughout the pandemic and into 2020, due to TCI Precision Metals’ heavy presence in the medical market. “Last year was actually very strong for us.”

Perhaps the most noteworthy of the markets at the moment is packaging. Though almost exclusively a mill-direct product, the can sheet business is playing a huge role in the availability squeeze as producers respond to demand growth in what is typically the steadiest of markets. 

But changes in consumer preferences are spurring one of the biggest consumption spikes in years. “The can sheet market is absolutely booming. It’s really been a renaissance of the can,” says Wittbecker.

The migration to more can consumption began before COVID. Younger people are increasingly moving away from both plastics and glass due to environmental concerns. Additionally, newer products such as energy drinks are sold almost exclusively in cans. Moreover, some old standbys such as the once appropriately named “bottled water” have even been shifting to can packaging. “There’s a lot of concern how the available capacity is going to price out,” he says, noting that many of the long-range contracts with the can companies will soon expire.

The takeaway is that most of the markets for aluminum flat-rolled appear to be solid for years to come. “We see, over the next five to 10 years out to 2030, really solid growth in the aluminum space, whether it be the lightweighting and EV push in auto or the sustainability story in any and all markets,” says Keown. 

The same is true in extrusions. “I think we’ll see year-over-year growth for some time, barring any major geopolitical or economic issue. I think it’s going to continue to climb,” says Hydro’s Stier. 

In the meantime, the industry will continue to operate on the mindset of sell it if you’ve got it. “Our salespeople joke they’re afraid to pick up the phone because it might be an order,” Ferran says.

Caption:
Commonwealth Rolled Products now operates the rolling mill in Lewisport, Ky. 
(Photo courtesy Commonwealth Rolled Products)