Aluminum: No trouble sourcing light metal in 2008
purchasing.com
The aluminum economy will weaken in 2008 due to a woeful housing market and flat automotive production, keeping supply plentiful and prices soft.
By Tom Stundza -- Purchasing, 11/15/2007
Purchasing of aluminum mill products in North America is likely to drop by a more severe 6% this year to 14 billion lbs than the earlier projections of a 2.5%–4% slide. And the purchasing outlook for 2008 from the construction, aerospace, automotive and consumer-packaging markets isn't all that bright, either. Orders are down entering the fourth quarter and market analysts expect a drop of 5% next year. So, buyers should see plentiful aluminum supply again with leadtimes for fabricated mill products at less than six weeks.
Buyer surveys verify that prices of aluminum mill products are falling this quarter after barely increase by 1.5% within North America in the first nine months. This comes after prices skyrocketed an unprecedented 19.5% in 2006. Buyers are reporting softening prices and expanding supply for companies as diverse as office furniture producer Rosemount Office Systems in Lakeville, Minn., to remote-control consumer electronic devices maker Buffalo Electronics in Charlotte, N.C.
By mid-October, world aluminum prices had fallen about 14¢/lb since June to about $1.10. But that drop could be somewhat deceptive, say the producers, who believe the decline is related more to financial volatility, stemming from a fallout in the subprime-mortgage markets, which caused investment funds to reduce investments, rather than a crash of aluminum-industry fundamentals.
Several aluminum companies expect world ingot and regional mill product pricing to rise again in 2008 as customers work through inventories. However, while analyst Tim Hayes at Davenport & Co. in Richmond, Va., agrees that "prices should remain high by historical standards," he and other market mavens also still expect 2007 to be the peak in aluminum transaction prices, followed by a gradual decline in coming years.
A key problem for stiffened pricing is that local mill product shipments through July were almost 7% lower than in the first nine months of 2006—flat-rolled products down 4% foil down 7%, extruded rod, bar, shape, pipe and tube down 16% and electrical conductors down 3%. With no major change in this environment ahead, "we continue to expect market surpluses from 2007 through 2009," says Hayes.
Weak demand from North American automakers has persisted as the credit crunch has trimmed consumer purchases—for automotive products especially—and there has been assembly slippage for truck trailers, boats and recreational vehicles. Production of aluminum-consuming consumer durables, such as white goods, has also been in decline since early 2004. That's why "underlying business for aluminum producers is softening," says analyst John Tumazos at Very Independent Research in Holmdel, N.J.
U.S. and Canadian consumption of aluminum also is forecast by UBS Securities analyst Brian MacArthur in New York to decline again in 2008, and mostly as a result of continued weakness in the motor vehicle industry. Motor vehicles account for around 40% of regional aluminum consumption and light-vehicle production is slated to decline 5.5% this year.
Aluminum sales have been disappointing, and production cuts have been the response. With sales expected to limp along until well into 2008, production is set to inch up by a scant 0.3% next year. This is nowhere near robust enough to support the view of the bullish metals analysts who forecast aluminum shipments to the transportation market will increase by 5% in 2008. John Anton at Global Insight's offices in Washington agrees that assembly cutbacks "are due to downturns in total expected demand in North America." However, he also points out that motor vehicle demand "will be hurt more by projected shifts in segment mixes favoring more fuel-efficient, affordable vehicles, including a stronger bias for overseas-built models."
Housing collapse has cut local demand
Purchasing of aluminum ingot (primary and secondary) and mill products by companies is down this year in all three major market segments—construction, transportation and packaging. And housing remains the biggest drag on growth, says analyst Anton.
"Reports from builders have not been encouraging, and builder sentiment again has slipped to a new low for this cycle." Existing home sales will continue to fall into next year, analysts agree.
Those analysts who forecast no slippage in North American aluminum use next year assume that regional economic growth will support increased consumption by makers of machinery and equipment, construction products and packaging products—although even they see continued declines in purchasing by the automobile and overall transportation sector outside aerospace. However, the majority of economists polled say the demand outlook for 2008 can't be very robust since the production of truck trailers is likely to keep dropping—and there is quite some debate whether the expected 10% rebound in the assembly of heavy trucks will occur.
Analyst Hayes at Davenport & Co. says that "aluminum shipments to the construction market should decline sharply in 2007, possibly by as much as 15%, which reflects the inventory destocking that is occurring this year—as well as an increasingly woeful housing market and indications of a slowdown in some nonresidential construction markets."
The collapse in new-housing construction is likely to persist next year, says Hayes, since he believes that housing construction and remodeling activity will get worse in 2008, and the nonresidential activity will be mixed. He expects aluminum shipments to the construction market to decline for the fourth straight year in 2008—forecasting a drop of 4% to 2.73 billion lb. Some analysts see a slight (1.5%) pickup in aluminum demand by the electrical market, mostly since high-voltage cable and wire are made almost exclusively from aluminum. However, they also see aluminum use by appliance makers and other durable good producers dropping another 3.5% in 2008 after sliding 7.5% this year.
A major market of disappointment for the aluminum mills has been packaging. Based on Davenport & Co.'s analysis, the beer, beverage, food and other packaged product can market is buying almost 5% less aluminum this year to make 2% fewer containers (99.4 billion vs. 101.4 billion in 2006). Looking ahead, the analysts see further slippage in aluminum demand ahead as can making could slide to 98.8 billion units. Market analysis shows that aluminum is holding its own against plastics and glass in the beer market, "but losing market share to competing materials in the soft drink market," says Hayes. Note that the water market is all plastic.
World demand is boosted by China
Alcoa CEO Alain Belda says worldwide aluminum consumption should finish 2007 up about 10% compared to 2006, or twice the earlier forecasts. Western World demand is holding up "so the world aluminum market is growing at a healthy rate," he says, but the key is that "China's demand is soaring." Global growth should continue next year, Belda told analysts and the media in a post-earnings conference phone call, "since China remains the major driver of growth."
China's growing aluminum demand has helped to push up 2007 prices for the aluminum outside North America. Consumption in China is projected to be up about 38% this year to just under 12 million metric tons. Aluminum consumption in Latin America should be up about 8%, and consumption in Europe should be up about 3%. Excluding China, consumption in Asia is projected to climb 5% for the year.
In 2008, world aluminum consumption will increase by almost 7% to 40.2 million metric tons, forecasts analyst Eamon McGinn at Australian Bureau of Agricultural and Resource Economics in Canberra. China still is expected to be the main driver of 2008 consumption growth as the country's use of the light metal is the largest in the world, says McGinn, rising 14% to 13.8 million metric tons.
But, there is some uncertainty about supply growth worldwide. Hayes expects output at 37.9 million metric tons in China, an increase of almost 12% above 2006 production. He says production could increase another 9% in 2008. Most smelters in China are running close to full capacity because of cyclically high aluminum prices so Chinese smelter operating rates could exceed 90% this year and climb to 95% by 2009.
Operating rates are high throughout most of the world, especially in areas where energy is not a production-cost penalty—as it is in some parts of the U.S. Capacity in the Pacific Northwest especially remains idle due to prohibitively high power costs. Note that energy accounts for more than 40% of the cost of producing aluminum.
Modest capacity restarts have been occurring in the U.S. this year, which should take the operating rate from 61% in 2006 to 69% in 2007. Just-released Aluminum Association data shows that the annual rate of U.S. production of 2.52 million metric tons through September was 10.4% stronger than the year earlier. Still, Hayes expects only a modest increase to 75% of capacity in 2009 "as most idle capacity likely will remain mothballed."
And that's why the global aluminum market analysts are in a tizzy over the fact that smelting companies are shifting production of the lightweight metal to such regions with lower energy costs as the Middle East, South America, Scandinavia and Iceland to meet future world demand. As these new aluminum facilities go up, producers will shut high-cost smelters. Aluminum analysts expect two to four million metric tons of existing high-cost aluminum production, mostly in Europe but also in the U.S., will shut down by 2010.
Aluminum demand and production is increasing in China, but not cheaply. Energy in China is expensive, and its availability is limited even with the vast construction of power plants. So, a new center of production isn't China but Iceland.
Your ingot soon may come from Iceland
Today, the aluminum industry in Iceland produces some 270,000 metric tons of aluminum ingots from bauxite that is being transported from places as far away as New Zealand. New plants and plant expansions are expected to bring the aluminum production in Iceland to more than one million tons per year in the next decade.
Alcan already produces around 178,000 metric tons of aluminum annually at Straumsvík in Iceland. Century Aluminum's Nordural subsidiary this year is expanding its smelter at Grundartangi to 260,000 metric tons/year from 220,000 metric tons now. This past June, Alcoa officially opened the 322,000 metric ton/year Fjaroaal ("aluminum of the fjords") aluminum smelter at Reydarfjordur in Eastern Iceland. Also, Alcoa has signed an agreement to support a geothermal power research project by the government of Iceland.
Although the pilot plant wouldn't be producing energy for Iceland's four power companies and Alcoa until 2015, the Pittsburgh-based Alcoa said it could lead to the first geothermal powered aluminum smelter in the world. The geothermal technology also could revolutionize the way Alcoa sources energy for its aluminum smelters worldwide, since a similar project is underway in Brazil.
Meanwhile, Russia's United Company Rusal and Norway's Norsk Hydro also are jockeying to corner supplies of hydro power in Siberia and cheap natural gas in the Middle East to fuel new metal plants. The producers are acknowledging that it is more important to be closer to energy sources than to customers, and effectively shifting the center of global aluminum production away from Europe and the U.S. to more energy-rich nations.
The moves also represent a shift in investment strategy, as producers funnel cyclical profits into power generation and less into developing aluminum products or applications. In the 1980s, the U.S. and Western Europe accounted for more than half of the world's aluminum production. Now those two regions account for less than 25%. "The market is moving away from North America and Europe," agrees analyst Willem Plaizier at AT Kearney Benelux in Brussels. "The market is now shifting to the developing countries"—and so is production.
The Middle East, with its abundant gas resources, is expected to be one of the fastest growth areas for new aluminum-smelter production. Norsk Hydro already has formed a joint venture with Qatar Petroleum to build an aluminum plant in Qatar. The $1.5 billion plant will produce 570,000 metric tons annually by 2009. Rusal aims to buy small local power companies and has formed a partnership with the Siberian hydro power monopoly to increase primary aluminum capacity by 60% in 2014. |
