This global commodity evolves to meet the needs of changing technology

November 2012 - Greener, lighter, faster, stronger—aluminum, a lightweight and durable metal, is a global commodity, and its pricing affects an array of industries. As technology advances and new alloys are developed, aluminum will be used in many more applications.

Aluminum has lost ground in aerospace, considered the “battle royale” by John Mothersole, senior principal economist at IHS, Washington, D.C. “The new generation of commercial airliners, most prominently Boeing’s 787 and Airbus’ A350, are heavy in composites with much less aluminum than previous aircraft. The 787, in particular, sent shock waves through the industry when plans were shown six or seven years ago,” he says.

With such a high-margin product, the switch to more composites prompted aluminum suppliers, such as Alcoa Inc., Pittsburgh, to develop new aluminum alloys to compete with composites. The company’s latest generation of aluminum lithium alloys is in demand as Alcoa expanded production to meet the response from customers, says Kevin Lowery, director of communications at Alcoa. “We expanded our aluminum lithium casting capability here in Pittsburgh and at our aerospace plant in Kitts Green in the U.K.,” both of which are expected to be up and running in the fourth quarter of 2012. Alcoa also is building a new greenfield plant in Indiana.

The new lithium alloys are included in the Boeing 787 design and are expected to be used on other single-aisle and twin-aisle aircraft. “We’ll work with both Boeing and Airbus to incorporate the alloy more into all of their planes,” Lowery says. “We are going to continue to work on improving materials to lower the weight of or increase the fuel performance of the plane, which bodes well for aluminum and aluminum alloys.”

Aluminum lithium alloys offer high strength and lower density, making them particularly attractive for aerospace and military applications, says James Lewis, communications at The Aluminum Association, Arlington, Va. “Engineers also take advantage of the higher elastic modulus of these alloys in their designs,” he says. “Aluminum lithium alloys are particularly attractive over carbon fiber in military applications because of their greater damage tolerance.”

Aluminum’s place in the aerospace industry is going through a transformation, says Lisa Reisman, managing editor of MetalMiner. “Aluminum lost quite a bit of market share when composites came in but it’s gaining some of that back with its new alloys,” Reisman says. “Certainly the market for more highly engineered aluminum is growing in other industries.” Although its presence in the aerospace industry is changing, “the picture for aluminum is much more interesting in the auto industry because it’s a big volume consumer and aluminum will take a significant market share,” she says.

A growing presence

As a result of CAFE regulations and other environmental initiatives to reduce CO2 emissions for vehicles, aluminum is a natural choice for many automakers. “You’re going to have to lighten up the vehicles,” Reisman says. “If you’re an aluminum producer, it’s a huge opportunity.” 

Despite the upswing in demand, Reisman believes “there are some elements that a car will never touch that will always be steel—so while it’s a huge opportunity, there’s no way it will ever make steel irrelevant,” she says.

Primary aluminum smelting remains a cost-driven business, with a specific focus on the price of electricity. “One of the things we’re seeing is the industry gravitate toward regions of the world where you can get low-cost electricity, ideally in the form of a captive hydroelectric facility,” Mothersole says, noting regions of the world currently attracting interest are Iceland (geothermal power), Quebec (undeveloped hydroelectric potential) and the Middle East (low-cost natural gas for electricity generation).

“Interestingly, China continues to see a huge build-out in rated capacity, even though the cost position of the Chinese industry is unfavorable compared to other regions,” he continues. China’s aluminum industry benefits from government support, receiving subsidized capital, below market electricity tariffs in many instances, and outright direct support from local and provincial authorities.

Although aluminum remains in surplus with the London Metals Exchange price relatively low, high regional premiums on top of the benchmark LME prices are a problem for manufacturers. Premiums vary by region around the world, but Mothersole points out LME prices highlight the fact that, perversely, metal is actually fairly tight for physical users in spite of an overall surplus condition in the market.  

Reisman says the difficulty of getting aluminum out of LME warehouses, combined with aluminum pricing dynamics on a per-ton basis, potentially is riskier to an automotive producer. “It’s a lot more expensive on a per-ton basis. I think there are mechanisms to manage that volatility,” Reisman says. “From a commodity risk management standpoint, companies are trying to minimize risk. Aluminum is by no means a cheaper commodity relative to steel.”

The real problem with high premiums is, unlike the LME price, such premiums are difficult to hedge, exposing buyers to a great deal of risk. “Elevated premiums reflect the huge amount of inventory currently locked up in so-called financing deals between banks and primary aluminum producers,” Mothersole says. 

“The profitability of these financing deals is a direct function of very low interest rates,” he continues. “Unfortunately for physical users of aluminum, the commitment of central banks around the world to very low interest rate policies for the foreseeable future means that these financing deals will be part of the landscape for at least the next two years.” MM

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