Evaluating the aluminum market

By Abbe Miller

November 2006- S. Gudder, a renowned mathematician in academic circles, said, "The essence of mathematics is not to make simple things complicated, but to make complicated things simple." While Gudder's love affair with numbers is endearing, applying mathematics to an economic forecast certainly isn't as straightforward as making the statement. In theory, the relationship between supply and demand should create the perfect scenario for plugging numbers into a set equation. But with so many different variables, even the greatest math minds haven't yet discovered the formula for predicting an accurate outlook.

Determing the future health of the aluminum industry can, however, start by assessing the level of demand. The industries in need of material range from transportation to construction and from electronics to HVAC. Service centers across the nation help end users get their hands on the aluminum.

"The distribution segment of the business is transaction oriented, meaning that they're on the cutting edge of the markets because they get business on a very short lead time," says George Pursey, market director for the specialty products business unit at Novelis Corp., Cleveland. "They're a good barometer of how the overall economy is doing because they supply a lot of different markets." But since the demands for each market do not rise and fall simultaneously, each must individually be scrutinized to discover which are in high demand and which may be tapering off.

Breaking it down
According to the Sept. 27, 2006 Davenport Quarterly Aluminum Outlook, the proposed 2007 growth rate for overall aluminum shipments is 0.6 percent, "tempered by greater-than-expected weakness in the housing market." Residential construction will face a correction year after the 2006 wave of high-end single-family homes swept over California, Florida and Washington D.C. Although commercial and industrial construction should offset some of the softening, the slowdown in residential building creates a trickle-down effect.

"We've all read about the housing bubble maybe bursting," says Pursey. "Housing starts are beginning to level off. And things like appliances, air conditioning and heating are tied to housing so they tend to track together."

The relationship that these markets hold with the construction industry will continue to dictate their level of success. Shipments to the consumer durables market are expected to dip to 3.6 percent, as estimated by the Davenport report, and other than non-residential HVAC, building-related sectors will stay soft.

New environmental regulations are also guiding the heavy-truck sector toward record lows. Government legislation that created the Clean Air Act Emissions Standard will require cleaner-burning engines for Class 8 trucks. Slated for enactment in 2007, purchases picked up this year in order to bypass the extra cost of the soon-to-be-required engines. Some estimates have Class 5-8 production down by 20 percent to 30 percent. "Basically anything that uses diesel is going to be subject to the new environmental regulations," says Pursey. "A lot of the strength that we see this year is pulling demand in from next year."

But the transportation industry as a whole, despite the negative predictions for the North American automotive industry, will find some of its footing in aerospace. Bill Sales, senior vice president, nonferrous operations at Reliance Steel & Aluminum Co., Los Angeles, says that heat-treated plate used in aerospace applications shifted from a shortage situation to one of tight supply. "The A380 Airbus has had a couple of delays, so they're pushing those schedules out," says Sales. "It's a major consumer of plate and so some of that plate becomes available and starts to come back into the market. It will be more available than it has been, but we think that it's still going to be extremely tight and that the market will still be good in 2007."

Electrical applications are another area looking at an upswing. Overall growth predicted for the industrial sector should land somewhere around 2 percent or 3 percent for next year. The communication sector, however, should show numbers that exceed that, fueled by internet, cellular-communication, high-definition-television and computer markets. Demand for heavy-gauge plate used in vacuum chambers in semiconductors will also retain its momentum. "That's a pretty good end user market for 6061 plate," says Sales. "It's been good this year and we think that it's going to continue on into the next, too."

Internationally speaking
For those who play a role in the production of the nonferrous material, it's no secret that the costs involved are steep. A major deterrent to smelting aluminum is the high price of energy, which has caused numerous facilities, many in Europe and the United States, to close during past years, pulling available metal out of the supply chain. Those that have stayed afloat have done so by finding a way to mitigate the elevated prices. Depending on the facility, 20 percent to 40 percent of operation costs are allocated to energy.

"If you factor in that about 25 percent of your cost is energy, it leads you into finding the lowest-cost power you possibly can," says Kevin Lowery, director of corporate communications at Alcoa Inc., Pittsburgh. "For any company, one of the first things that you have to consider is the availability of competitively priced, reliable and long-term power. You have to have all three." So with that in mind, Alcoa found the trio in Iceland and plans to have the greenfield operation up and running by the second quarter of 2007. Various aluminum producers are doing the same all around the globe, but the waiting periods required to bring new facilities online will leave production capacity low for some time to come.

Energy is just one of many factors facing the aluminum supply for the year to come. "The most significant component that has affected commodity aluminum in pricing would be the ingot cost," says Sales. "We've had a fairly interesting year in terms of what ingot has done throughout the year. Midwest spot pricing has seen a lot of volatility and fluctuation."

It's also easy to point the accusatory finger in the direction of China. The 2007 deficit forecasted in the Davenport report indicates slower capacity growth but below-trend growth in demand. The authors of the report cite "escalating power prices" and "restarts in China due to alumina moving into surplus combined with some additional power availability" as major factors weighing on production. Because of the surplus that China has been pushing into the market, the authors feel that alumina prices could fall to $250 per metric ton, and they predict it to stay in that range for the next couple years. However, there is talk that the eastern powerhouse may drag things to a slower pace.

"Energy is still kind of a precious commodity over there," says Sales. "They don't want to be exporting their energy, so to speak, so they have some tax issues that make it a little more difficult for those companies to ship product into the United States."

Again, "you have two factors with China," says Ernie Taylor, vice president, aluminum at Ryerson Inc., Chicago. "You have consumption, which is moving at a very fast pace and then you have production, which has been shuttered. I guess that this is one of the wildcards that analysts bring up, 'What will China do? Will this production capacity come back online and will it impact the LME?'"

No matter how China affects the international scene and regardless of the price of energy, aluminum producers feel confident about the upcoming year. The poise partially comes from new opportunities emerging for the lightweight metal. One of the first to utilize this characteristic has been the military.

"We're doing energy-absorbing doors for Humvees and increasing the armor on other types of mobile equipment," Lowery explains. "You can put all of the armor on it that you want, but if it's too heavy and won't move, it doesn't do you any good. That's part of the equation that aluminum brings."

So it turns out that aluminum does fit into an equation, and one that is solving design obstacles not only for military applications but also for appliance manufacturers struggling with the fluctuating surcharges associated with stainless steel. Despite the minor economic downturn scheduled for the upcoming months, aluminum will continue to survive in its established markets while blazing a path into new ones, as well. MM

By Abbe Miller, from the November 2006 issue of Modern Metals.


















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2016 End User Outlook

Although low pricing on metal products across the globe once inspired companies to stock up, there’s little appetite for risk peering into 2016.


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