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Aluminum Forecast
Wednesday | 15 December, 2010 | 7:00 am

Sustainable future

By Lauren Duensing

November 2010- Business optimism is growing as 2010 comes to a close. And, although 2011 is not going to be a record year, it will show improvement over 2010, particularly for aluminum products.

China has been the main global driver for aluminum demand. RBC Capital Markets forecast in its fourth-quarter market aluminum outlook that demand will rebound to 12.7 percent in 2010 and 8.1 percent in 2011.

"China has been the main driver of demand growth to date, although growth outside China has begun to pick up," the report noted. "In 2009, Western World demand fell by 15 percent. We forecast a rebound in Western World demand by 8.2 percent in 2010, consistent with the recoveries from previous recessions, though below the rate of growth in apparent consumption in the first half of the year. The key risks to our forecast are the degree of slowing in Chinese demand in the second half of 2010 and the strength of demand growth outside of China once restocking comes to an end."

Barclays Capital Commodities Research pointed out, "Despite the economic noise, one trend has been startlingly clear: sustained strong growth in base metals demand. This has been evidenced by the counter-seasonal decline in reported inventories for a number of the base metals and is especially impressive given that it has occurred during a period that is usually seasonally weak."

With respect to aluminum, Barclays noted, "2010 so far has been a year of new records for aluminum. LME inventories hit a record high, global production hit a record high (albeit temporarily), and global demand has posted its strongest-ever recovery."

Long-term growth
Aluminum producers are seeing a stable U.S. market, with much of the industry growth coming from emerging economies’ infrastructure needs. In the United States, light vehicle production is improving this year, and housing starts are slightly above 2009’s dismal numbers--with new construction still posting weak results.

Kaiser Aluminum Corp., Foothill Ranch, Calif., in its second quarter and year-to-date 2010 financial report, pointed out, "The underlying second quarter results for our Fabricated Products segment were the best in two years," Jack Hockeman, president, CEO and chairman, said in a press release. "Adjusted operating income increased 30 percent on a sequential basis and 75 percent compared to the prior-year quarter. The sequential increase was driven by higher value-added revenue on stronger-than-expected shipments of aerospace and high-strength applications as well as continued improvement in manufacturing cost efficiencies."

The company noted in a presentation at the KeyBanc Basic Materials and Packaging Conference on Sept. 15 that demand outlook is positive in regards to commercial aerospace, general engineering and automotive. For aerospace, there’s a trend toward monolithic design, larger aircraft and increasing build rates. For automotive, new CAFE regulations will increase the custom aluminum extrusion content per vehicle.

"From an industry standpoint, 2010 is shaping up to be a much better year than the second half of 2008 or 2009," said Steve Demetriou, chairman and CEO of Aleris International Inc., Beachwood, Ohio, at a press conference held during Aluminum Week, Sept. 20-23 in Chicago.

Demetriou pointed out aluminum demand has been better than expected, "led by certain sectors like the automotive industry. ... The truck trailer industry, which is a big user of aluminum was not expected to recover until 2011 at the earliest, and we’ve actually seen some modest recovery in 2010, so that’s happening a little faster than we expected. And aerospace is still operating at the bottom of the cycle, although still at stable levels--still trying to work off inventories."

Jeffrey Henderson, director of marketing, Sapa Extrusions North America, Chicago, concurs that demand related to the transportation sector, such as truck and truck trailer, is more robust. "Their backlogs are building at a nice clip. However, we see that offset by continued stagnation in residential building construction and a continuing negative environment for commercial building and construction.

"Now, the industrial sections are up," Henderson says. "They are certainly not robust, but they have improved this year and are holding at an improved level. We are just not certain if it will sustain this improvement or if it will level off."

As a result of the improvements in the market, the Arlington, Va.-based Aluminum Association’s September numbers show estimated aluminum demand is 18 percent ahead of last year.

"Preliminary estimates indicate that aluminum demand in the United States and Canada (shipments by domestic producers plus imports) totaled an estimated 11,720 million pounds during seven months of 2010, 18 percent above a year ago. Demand for semi-fabricated (mill products) was up 13 percent to a total of 8,197 million pounds. Apparent consumption (demand less exports) in domestic markets totaled an estimated 9,922 million pounds, 18.1 percent above 2009," the association noted.

The short-term outlook is less bullish. "We saw a nice rally in orders early this year that seems to have lost momentum as the year has unfolded," Henderson says. "So, we’ve taken a more neutral view of what next year will hold.

"The overall order level, while better than last year, has not continued to rise, and we really expected it to increase--if a full rally was in effect," he says. "So we’ve hit a bit of a plateau in order levels, and that has caused us to think next year will be flat to slightly positive."

"All in all, we’re obviously nowhere near where we were at the peak, back during the 2006--2007 time frame," Demetriou pointed out. "But it’s a heck of a lot better than 2009, and everyone is prepared for a long, slow recovery."

Getting the word out
As demand continues to pick up, companies involved in the industry plan to increase awareness about aluminum’s sustainability as well as educate customers about its many uses.

"We can focus very specifically on the role aluminum plays in helping our customers solve very clear challenges that they face with their customers and their markets in packaging, construction and transportation," said J. Stephen Larkin, president of the Aluminum Association, during the Aluminum Week press conference. "What we will be working on in the coming months is a very clear program to get the message out on the importance of aluminum in helping our customers, and through our customers, the country."

Ultimately, although the future looks relatively bright for aluminum, companies cannot become complacent, sit back and enjoy the uptick.

Henderson points out the necessity of customer service--taking care of current customers and attracting new ones.

"Sapa has engaged the Aluminum Extruders Council to form a committee to develop a customer outreach program, which we introduced at Aluminum Week in Chicago. We had a great reception from the members. It is designed to pool capital and human resources to carry the industry’s message to strategic markets that are poised to grow and increase the consumption of aluminum extrusions," he says. Henderson also stresses the importance of educating customers about the possibilities of aluminum products.

"One anecdote that we heard discussed at [Aluminum Week] involved a recent solar show where there were dozens of steel fabricators present, as well as two steel industry voices with booths promoting steel," Henderson says. "In contrast, two aluminum fabricators were displaying and nobody from the industry; we were really outgunned. We believe we have a better story, we just need to get it out.

"We think it’s been simply a lack of education and a lack of resources applied to getting the message out," he continues. "But, even without that, aluminum has grown in areas like automotive and solar. We continue to lose ground, as we have for years, in building construction, and we need to look at that and see if we have a new solution that could help us gain market back."

Henderson says the aluminum industry has the potential for a strong presence in solar, automotive and building construction, and he points out extruders are working hard to focus on new solutions.

"The Keep Aluminum Windows campaign through the AEC has been a very effective defensive strategy where we have addressed the code and legislative issues," he says. "We challenged ourselves last month to find an offensive strategy. Is there a new solution we can develop? Are there new applications using aluminum extrusions that we can begin to think about? We owe it to the North American market to have a superior offering. Let’s figure out what that should be from an our customers’ standpoint, and let’s fund the effort to get it out there."

All predictions point up
The industry as a whole expresses pride in its efforts to achieve relatively good numbers in 2010. And, aluminum producers are ready to take advantage of any growth spurts in 2011.

Cost reduction to counteract inflationary pressures and little forward visibility will be major challenges, but companies are focusing on the basic business strategies of customer service and quality to pull through.

"The down side of the market has forced us to rationalize some assets and position ourselves to remain profitable in lean times, and we’ve done that," Henderson says. "We’ve invested in new equipment where it made sense, closed some facilities and streamlined internal operations through our internal lean manufacturing program. Sapa is mindful of the fact that it still needs to be as lean as it can to become a low-cost provider for our domestic customers.

"You don’t want to cut yourself so deep that you can’t respond," he continues. "Then we’ll see gaps in service, and our customers don’t want that. It will be interesting to see which extruders did a good job of that as the market recovers in the next couple of years. We think we’ve done a good job. All in all, it’s been a positive year for us and well earned because we worked hard to make that happen. Any extruder that survives this will deserve a lot of kudos. It’s a different market. Frankly, this recession has forced our industry to become leaner, stronger, better extruders. As a result, we’re a stronger industry than we were three years ago." MM

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