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Aluminum

The 13th element

By John Loos

November 2007- Triskaidekaphobia: the fear of the number 13. For uncertain reasons, the number 13 is considered unlucky in popular culture. Friday the 13th is considered the most ominous of days. In tarot readings, the 13th trump card is the Death card. Even the building Modern Metals is located in doesn't have a 13th floor.

One would think, then, that aluminum, the 13th element on the atomic chart, would be avoided like the plague. Not so. The world has been smitten with the lightweight, exceptionally strong metal since the advent of the electrolytic process in 1886. If anything, it's brought good fortune, innovation and creative solutions to the industrialized world.

The global demand for aluminum has increased significantly in the past decade, largely thanks to China, and top players recognize its value in the coming years, particularly as the global need for greener vehicles, buildings and homes increases exponentially. So in spite of some bad luck in 2007 and an uncertain 2008, the industry is finding comfort in expansion and consolidation as new applications are explored and new wells of demand are tapped.

Beyond the Big Three
Each of the three biggest aluminum markets--construction, transportation and packaging--experienced a downturn in 2007 and have mixed outlooks for 2008.

According to Davenport & Co. LLC's quarterly aluminum outlook for the U.S. market, construction shipments are projected to be down as much as 15 percent in 2007 as the weakened housing market offset the good news from nonresidential construction. U.S. shipments to the automotive industry look to be down about 4 percent despite increased aluminum usage in vehicle production, and packaging may be down as much as 5 percent, a hefty number considering how even-keel that market usually is.

Among the few markets with projected 2007 growth: aerospace and, hopefully not in response to the drops in the Big Three, beer cans.

For 2008, recovery is expected in some markets, but not all. Construction should stay down since a bottom has yet to be predicted for the housing market. But transportation should make modest gains as automotive in 2008 is predicted at or above 2007's projected North American sales mark of 15.5 million and the truck and truck-trailer markets recover from the emissions regulations of early 2007. Pre-buying should kick up again in preparation for the next round of regulations in 2010. Packaging is also expected to stabilize.

"The fundamentals in the aluminum industry remain pretty strong," says Peter Finnimore, aluminum sales director for UC Rusal, Moscow. "Demand over the last few years has experienced solid growth, and probably even unprecedented growth, if you look at it in the context of the last 20 to 30 years."

According to Davenport & Co., in spite of the recent and unmistakable drop in U.S. demand (about 7 percent), global demand will have increased about 10.4 percent in 2007. The company attributed this to China, which saw its demand grow a staggering 37 percent this past year.

One area running free from the pack is the aerospace industry, which has seen tremendous gains thanks to new, lighter aircraft being designed and demand for new aircraft rising. According to the Boeing Co., the industry currently needs more than 28,000 new commercial aircraft to replace old, outdated models.

So it's not all bad news. Jack Miller, business area president of North America for Sapa Extrusions Inc., Pittsburgh, is more optimistic. He feels the current state of the market is actually relatively strong for those companies focused on long-term expansion and enhancement of operations.

"The market isn't helping any if you're looking at short-term results," Miller says. "But when I say that this isn't a good time, I say that only if you're focused on your volume today. It is a good time, however, if you're looking to reposition or upgrade your asset base, which we are. It's a double-edged sword. We want to position ourselves for tomorrow, but we also want to successfully operate today."

Size continues to matter
It seems like every few months, another major aluminum merger has been announced or finalized. In the spring of 2007, Russian aluminum titan Rusal joined forces with OAO Sual Holding to form United Co. (UC) Rusal, currently the largest aluminum producer in the world. But, before the ink could dry on that deal, Rio Tinto announced its intentions to take over Alcan, which, once completed, will make the company the biggest name in the industry.

Not to be outdone, according to Reuters, UC Rusal is planning to increase metal output by 65 percent by 2013 through an $11 billion investment program, which, if realized, will allow the company to reclaim its crown.

"I think most industry analysts would say, and not only within the aluminum industry but across the commodities markets, consolidation will be ongoing," adds Finnimore. "You see it in every sector these days. Consolidation is part of the ongoing globalization of industries."

Companies are getting bigger at a brisk rate as globalization and consolidation in industries across the economic spectrum become not just growing trends, but sensible survival tactics. "Size is really an opportunity and a strength," says Finnimore. "It gives us the ability to open doors. We don't need anyone to introduce us."

For companies not as big as UC Rusal, consolidation means finding ways to stay relevant and necessary to the industry by expanding operations and finding new niches to harvest from. "In my opinion, it's a cycle," says Mike Browand, CEO of Peng Cheng Aluminum, Walnut, Calif. "The big people get big and the little people get squeezed out and then suddenly the little people come back and compete with the big people because they're a little more flexible. The small extruders are always able to keep what they have going, they just play in a different arena."

For the large (but not huge) Kaiser Aluminum, Foothill Ranch, Calif., a strategy of expanding operations and thinking globally is proving successful. This year the company has announced $230 million in new investments.

"The way to stay healthy and to continue to work after those kind of consolidations is to do the best that you can and make the best products you can," says Keith Harvey, vice president of sales and markets, aerospace and general engineering products for Kaiser. "If you're a great supplier, people are still going to want to buy from you."

A fast boat to China
"Smelting, raw materials supply, downstream growth, you name it, China has impacted the aluminum industry in a very big way," says Finnimore. Along with consolidation, one of the biggest catalysts for change in the aluminum industry has been and will continue to be China. It's currently the largest producer and consumer of aluminum in the world and its growth potential, at times, seems limitless. According to Davenport & Co. vice president of research Timothy Hayes' report at the MSCI's Economic Summit: Forecast 2008, Chinese output is closing in on 13 million metric tons and demand is soaring to similar levels. On top of this, it seems probable that the growing giant will increase importing in the upcoming years, meaning increased opportunities for those looking to tap the Chinese market.

"In terms of development opportunities, we see China as a particularly strong one," says Finnimore. "The big change we see there is that in three to five years they will again become a net importer of aluminum. China was a net importer through about 2002 and then their production capability ramped up considerably. We see that reversing, so that's an opportunity." UC?Rusal is watching China closely and is poised to benefit from the rise of imports to China.

Davenport & Co. predicts Chinese demand to grow 20 percent in 2008 with a slight tapering after the Beijing Olympics. Also, long-needed reforms in the capital market and banking systems may be implemented after the games, which could cool some of the growth. Still, China shows no signs of relinquishing it's considerable influence on the world economy. "If you count China and India, there're a couple billion people looking to become consumers and they're going to need products," says Harvey. "You have to look at [the growth potential in those regions] and say there could be good times ahead."

The surge in China is indicative of a continued globalization of the aluminum market, with more imports continuing to pour into the United States and more companies hopping borders to do business.

"It's not only just China, but it's India and the rest of the world," says Harvey. "All the barriers have really come down."

The here and now
So what will 2008 look like? The recent credit crunch and the continued slide in the housing market will be enough to keep companies wary, but overall, the industry should have better luck.

As consolidation and China continue to impact business, so will the continued move toward eco-friendly production measures. In tandem with this, the need for green construction and design--a growing niche perfectly suited for sleek, lightweight, highly recyclable aluminum--and the demand for cleaner energy sources will ensure aluminum's place in future economies.

"The customer expects their suppliers to be responsible whether it be at the level of the environment, safety or supply chain," says Finnimore. "We see this trend continuing. It's obviously been led by Europe."

George Pursey, market director and distribution OEM manager for Novelis, Atlanta, also sees aluminum as playing an important role in the green movement, as its applications and notoriety for being a light, strong metal make it an ideal choice for eco-friendly building.

"The big advantage of aluminum is its recyclability," says Pursey. "And that's something that ties directly into the whole green movement." Novelis would know, having recycled 39 billion aluminum cans last year.

Pricing also may be a major player in the next six months, with the bull market seen since 2003 now running out of steam. According to The O'Carroll Aluminum Bulletin, prices should be in decline over the next few years.

"If the market trends the way it is going, I'm sure pricing will be one of the bigger headlines in the industry next year," says Browand.

Finally, the distribution market, after entering a de-stocking mode in early 2007, looks to be stabilizing. "Distributor inventories are down to normal levels and we've seen the distributor buying pattern start to return to normal," says Pursey.

One thing is certain: As the global economy continues to expand and change, the need for aluminum will remain. With China and India rapidly ramping up production while simultaneously turning their pastoral populations into active, modern consumers, there's much potential growth in the coming years. In the short term, however, there's still some bumps to get through, which is more the reality of today's global economy than any perceived misfortune of producing the 13th element.

As in real life, numbers aren't lucky or unlucky. It's the drive and tenacity of the individual or company that creates true fortune. MM

By John Loos, from the November 2007 issue of Modern Metals.

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