Off the grid?

As of the first quarter of 2018, a period of oversupply in the aluminum market has ended. Demand prospects remain strong and follow two consecutive years of 5 percent growth in total metal requirement.

While the global economic pickup contributed to this, manufacturing trends, including automotive lightweighting, have increased aluminum intensity per gross domestic product (GDP) output. Outside of China, the supply response has so far been slow.

Excluding China, the deficit of primary (electrolytic) aluminum doubled in a year, and new supply has been slow to come online. Supply and environmental reforms in China now are limiting production growth there, and Chinese authorities have closed what they considered to be “illegal” production sites.

Stuck in neutral

Sluggishness in primary aluminum supply provides an opening for recycled aluminum. Recycled aluminum still accounts for less than 30 percent of global consumption. However, although industry and political bodies are promoting higher recycling rates, scrap consumption is still expected to hold at or below 30 percent of total demand. Strikingly, recycled metal’s share of total demand has been falling in the aluminum sector.

The relative fall in recycled aluminum is partially because of China. The country contributed a large part of recent demand growth but has a low share of castings consumption compared with total demand.

Castings are the most scrap-intensive aluminum product. Indeed, aluminum castings account for around 50 percent of aluminum scrap demand, but only approximately 22.5 percent of total aluminum demand. This has contributed to relatively low recycled aluminum consumption.

The castings outlook for China is, in fact, better than in most regions, as it is one of the only locations where the penetration of aluminum castings rose in the 2013 to 2017 time frame.

The fall in aluminum castings’ total share of consumption is expected to become a worldwide trend in future years. Globally, castings’ share of total semis consumption is forecast to fall from above 23 percent to below 21.5 percent by 2027.

While the change looks small in percentage terms, it equates to a loss of 1.6 million metric tons per year in castings consumption by 2027. Castings’ intensity relative to other aluminum products will fall because of changes in consumer trends, particularly in the automotive sector.

Electric vehicles: a threat to scrap?

Electric vehicles (EVs) are a particular risk to global scrap demand as high adoption would likely reduce castings consumption. According to CRU, the automotive industry accounts for more than 60 percent of castings consumption.

These castings, predominantly produced from secondary foundry alloys (SFAs), are used to produce automotive power train components, such as engine blocks, cylinder heads, pistons and drive shafts, where strength at temperature and wear resistance are more important than ductility. As of 2017, the automobile industry accounted for from 65 percent to 75 percent of secondary castings demand in China, Western Europe, Japan and the United States.

Improvements in battery technology and increasing environmental awareness among consumers have pushed the market for EVs to a tipping point. EVs can now rapidly go from niche to mass market, transforming the outlook for certain commodities. Aluminum demand from the transport sector will face great changes as EVs gain market share.

Overall, aluminum intensity is considerably higher in EVs compared with vehicles containing the traditional internal combustion engine (ICE). Battery electric vehicles (BEVs) mainly use primary-aluminum-intensive aluminum products—rolled, extruded and primary castings.

ICEs are secondary-castings intensive—used in engine blocks, piston heads and transmissions—components that are not used in EV power trains. With an engine and a battery, hybrid electric vehicles (HEVs) and plug-in hybrid electric vehicles (PHEVs) also will rely heavily on primary and secondary castings

The move from ICEs to EVs greatly will increase the intensity of primary aluminum-based products in cars. However, BEVs, which run solely on electric motors, have 44 percent lower SFA consumption per vehicle compared with ICE vehicles.

Other types of EVs that use a combustion engine, namely HEVs and PHEVs, have a less pronounced impact on overall scrap demand.

Consumer decisions in which certain automobile technologies become popular will play a large role in determining recycled aluminum consumption. If consumers move toward HEVs instead of BEVs, the marginal shift from ICEs creates 16 percent more secondary castings consumption per vehicle.

New markets and the near future

While EVs may limit recycled aluminum demand in the U.S., Europe and China, scrap import requirements from other regions will provide a market for excess scrap. By the mid-2020s, the net supply position of four major scrap consuming regions —China, Western Europe, Japan and the U.S.—will move to a surplus (perhaps by the early 2020s).

Lower imports of scrap into China are the main contributor to the surplus, with India importing most of the remaining scrap. Today, China is importing scrap from other regions in addition to those included in the chart on this page, “Rising scrap generation in China will lead to lower imports.” By the late 2020s, however, China’s net scrap imports will fall to a fraction of European, U.S. and Japanese net exports of scrap.

Hence, India will become a particularly important hub of scrap trade and consumption in the coming years. In 2016, India domestically generated only 25 percent of national scrap consumption, with the rest coming in as imports. During the next 10 years, CRU forecasts scrap demand to double to 2.15 million metric tons per year in India, with imports needed to cover this demand.

Indian scrap generation should rise along with urban population growth; therefore, India looks well-positioned to receive excess global scrap from the 2020s onward.

As well as a fast-growing consumption base, the share of Indian castings as a percentage of total semis shipments is expected to remain broadly flat over the next decade, improving prospects for scrap consumption. India can, therefore, look at importing scrap from highly developed regions that are forecast to see declining proportional castings consumption, particularly the U.S. and Japan.

Over the past year, global economic growth and possible U.S. trade actions provided a bullish picture for the aluminum market. GDP growth in North America and Europe remains strong, with the Eurozone posting the highest year-on-year growth since 2007. A weaker U.S. dollar and higher oil prices also are supporting London Metal Exchange (LME) aluminum prices at the $2,200-per-metric-ton level.

The possibility of U.S. trade action on aluminum imports also would help support prices in 2018. Market participants are awaiting a decision by U.S. President Donald Trump over whether to impose import tariffs on aluminum via a Section 232 trade case. The case focuses on whether imports constitute a national security risk to the United States and require duties to be imposed.

While China’s macroeconomic growth remains robust, aluminum stockpiles in that country are rising quickly. With some doubting the effectiveness of Chinese production controls, this may attract selling activity from some fund investors. Already, this has caused futures prices on the Shanghai Futures Exchange to lag those on the LME.

CRU forecasts that the Chinese market will remain in a surplus of above 1 million metric tons in 2018.

Henry Van is an analyst and consultant with London-based CRU and can be contacted at henry.van@crugroup.com. He will provide more insight into the effect of electric vehicles on the aluminum market at CRU’s World Aluminum Conference 2018, http://bit.ly/2zVAMtp, taking place in London in late April.