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Aluminum Forecast
Monday | 30 November, 2009 | 8:58 am

Making progress

By Lisa Rummler

November 2009 - When Lehman Brothers filed for bankruptcy in mid-September 2008, the effects reverberated around the globe. "The American financial system was shaken to its core," according to The Wall Street Journal, with the collapse of the 158-year-old company, which helped kick off a worldwide recession.

Fast-forward to the fall of 2009. Countries and companies are picking up the pieces, and some small signs of recovery pepper the business landscape.

This is true in regard to the overall metals industry, as well as aluminum in particular. With any luck, 2010 will build on the progress made this year and take it to a higher level, according to Scott Kelley, president and CEO of Service Center Metals, Prince George, Va.

"I think it’s safe to say that we’ve hit the bottom to some base level of demand, [and] inventories appear to be rightsized," he says. "We’re optimistic that in 2010 we’re going to see an increase in demand as business conditions in general continue to stabilize. Taking the capacity out, consolidation and destocking--with those three things and even a slight uptick in demand, we think that bodes well for the 2008-2009 recession survivors."

By the numbers
According to The Aluminum Association Inc., Arlington, Va., the aluminum supply is made up of three sources: primary, which is domestic production from alumina; imports of ingot and semifabricated products; and recycled, or metal from scrap (also known as secondary recovery).

From January to August, the primary production component of aluminum supply was about 1.2 million metric tons, according to the Department of Interior’s U.S. Geological Society. For the same period last year, it was about 1.8 million metric tons.

Additionally, the total new supply of aluminum in July 2009 was 766,000 metric tons, according to USGS. In July 2008, it was 813,000 metric tons.

Although domestic primary aluminum production in August was slightly down from July and 40 percent lower than the year-ago level, there were some bright spots in regard to scrap.

According to a USGS press release, "Total aluminum recovered from scrap in August 2009 was 277,000 metric tons, 6 percent higher than the total of the previous month and slightly higher than the total in August 2008. Of this, 174,000 metric tons of aluminum was recovered from new scrap, 12 percent higher than the amount in the previous month and slightly higher than that of August 2008. Aluminum recovered from old scrap in?August 2009 totaled 103,000 metric tons, which was 3 percent lower than that in July 2009 and 5 percent higher than the amount in August 2008."

Importance of inventory
Although inventories appear to be rightsized, Kelley says there doesn’t seem to be any real strength to end-use markets.

"There’s a level of demand, but it’s still at a low level," he says. "We’ve seen a pretty significant increase in orders over the last three months, but I think in large part it’s due to restocking more than anything else."

This phenomenon has changed the way Service Center Metals sells aluminum extrusions to service centers, according to Kelley.

"We were getting orders out two, three, six weeks," he says. "Everything is needed immediately now. And when I say immediately, a week and sometimes even less. People don’t want to keep [stock] on the shelves, and when they need it, they need it right away."

This trepidation regarding inventory stems from the drop in metal prices that came in mid- to late 2009, says Kelley.

"Everybody in the second half of last year, and the aluminum industry in particular, really got stung with the drastic decrease in metal prices," he says. "And even with business conditions picking up and metal prices rising pretty significantly, people are still reluctant to put stock on their shelves."

Additionally, Kelley says the demand for aluminum extrusions took a hit even before the worldwide financial meltdown.

"We were suffering in the extrusion industry pretty significantly prior to the conditions at the end of last year--extrusion demand was down 25 percent from September 2006 to September 2008," he says. "And since September 2008, it’s down another 20 percent on top of that."

Taken together, these events forced some producers out of the aluminum extrusion industry, according to Kelley. They also created a driving force behind consolidation. Not all the effects have been negative, though.

"On the positive side, it’s really rationalized some of the capacity in our industry," says Kelley. "It’s forced companies to really take a hard look at their costs and their efficiencies. If you’re one of the recession survivors, it’s made you more competitive."

Making strides
Coming out of the economic turmoil of late 2008 and early 2009, many aluminum companies have been driven to innovate with services and new capabilities.

"We’re compressing lead times on everything we produce in the plant--and not just the popular sizes--and we’re producing smaller minimum quantities to help service centers control their inventories," says Kelley. "Ultimately, what this does is, at the same time, drive out costs. And a lot of it is because of these things that we’ve really been forced to do. We’ve been forced to get better. During times like this, you really get to test yourself."

For Alcoa Inc., Pittsburgh, implementing a series of cost-cutting measures, among other things, had a positive effect. On Oct. 7, the company announced that it returned to profitability in the third quarter of 2009, with revenues up 9 percent over the second quarter of 2009.

"Revenues for the quarter were $4.6 billion compared with $4.2 billion in the second quarter of 2009," according to a press release from Alcoa. "Sequentially, revenues were helped by an increase in realized prices for primary aluminum to $1,972 per metric ton from $1,667 per metric ton in the second quarter, as well as stabilization in the end markets."

Additionally, Alcoa’s net income was $77 million in the third quarter of 2009, compared with a net loss of $454 million in the second quarter.

"The financial and operational measures we took in the first half of the year are having a strong positive impact on our cash position and profitability," said Klaus Kleinfeld, president and CEO of Alcoa, in the press release. "Despite unfavorable currency and energy headwinds, our performance this quarter indicates that Alcoa is weathering the economic storm and is in excellent shape to benefit when the market recovers."

In the third quarter of 2008, the company’s revenues were $7 billion, and it had a net income of $268 million. These numbers are larger than those posted for the third quarter of 2009, but Alcoa appears to be cautiously optimistic for the future.

"In the second half of 2009, there are signs that key markets the company operates in are stabilizing," according to the press release. "Due to low inventories at distributors and rising shipments, regional premiums are improving, and global aluminum consumption is expected to increase 11 percent in the second half of 2009."

Going green
Looking ahead, aluminum producers are extolling aluminum’s high level of recyclability in finding innovative uses for the metal in new and established markets, including construction.

This was the topic of a presentation in early October by Eddie Bugg, director of sustainable solutions for Kawneer, part of the Building and Construction Systems business unit of Alcoa.

"Aluminum brings remarkable value to the building and construction market," he said in a press release. "It is lightweight, durable, corrosion-resistant, energy-efficient, aesthetically appealing and infinitely recyclable. Nearly 75 percent of aluminum ever produced since 1888 is still in use today, and 95 percent of aluminum used in buildings is recycled."

Aluminum and solar energy also have a potential future together. For instance, Hydro Aluminum, Linthicum Heights, Md., owns about 35 percent of Ascent Solar Technologies Inc., Thornton, Colo., a producer of flexible thin-film solar modules.

In October, Hydro invested about $5 million in the company. According to the company, the financial boost will allow Ascent Solar to bolster its 30-megawatt thin-film production facility in 2010. MM

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