Aluminum Faces Reality Check

With the clock winding down on multi-national production controls, the aluminum market could be headed for realignment in the next few months.  Are producers and processors prepared to adjust?

Aluminum, by definition, is a soft, shiny, tough metal. As spring moves into summer, the marketplace is going to find out just how tough this commodity’s mettle is in a market that promises to be tougher.

Aluminum has had some glory days since 1991. Many expected the metal to lose some of its shiny luster after a Memorandum of Understanding was signed early in 1994 between the major producing countries of North America and Europe, providing a negotiated primary aluminum production abatement.

Was that agreement good or bad for the aluminum industry? Most aluminum industry associations and corporate observers are quick to point out that the MOU was a government agreement -- although the aluminum industry had petitioned governments for assistance -- not something signed by the world’s aluminum associations or the commercial entities involved in day-to-day production and recycling of aluminum.

In supply-demand terms, world aluminum consumption exceeded western world production -- including Eastern Bloc exports -- by about 800,000 metric tons, according to the Institute of Scrap Recycling Industries, Washington. That statistical shortfall was met by existing stocks held by producers, consumers and merchants. "The memorandum of understanding only added to aluminum’s strength in the world market," says Robert Garino, ISRI’s director of commodities.

"For the first time in five years, every segment of the aluminum industry boomed," says Kenneth Hutton, executive vice president of the National Association of Aluminum Distributors, Philadelphia. "Regardless of the Memorandum of Understanding struck 12 months ago, aluminum demand from every sector simply outstripped supply. Price and profits responded according to traditional economic laws."

Hutton says that there was a psychology associated with the MOU at the beginning of 1994 and credits the actual outcome in the aluminum market more to demand outstripping supply.

By February of 1995, just halfway through the agreement’s life, there were signs that European smelters, starting in Spain, were going to disregard the MOU. Producers were assessing the increased demand and gearing up to put more capacity on line.

In addition — and perhaps more importantly — the individual Russian states were moving to sell all the aluminum they could, regardless of the terms of the agreement.

Six nations had participated in the 1994 Multilateral Conference on Aluminum held in Brussels. It appeared then that an agreement was reached on a program to cut aluminum supplies. Parties to the agreement were Australia, Canada, the European Union, Norway, the Russian Federation and the United States of America. According to Russian Deputy Minister George Gabounia, the Federation reflected a general expectation that market forces were likely to lead to a world-wide reduction in annual aluminum production. Russia agreed to reduce aluminum production in two steps -- starting February 1, 1994 -- by 300,000 and then 200,000 tons, respectively.

At that time, Gabounia said the Russians expected the total reduction in world aluminum production outside Russia to amount to not less than 1.5 million tons, compared with November 1993 levels. A number of U.S. traders say that the slowdown in Soviet exports has made the industry healthy again.

It should be noted that the agreement is written to remain in effect "for 21 months at the maximum." That would set the close of the agreement in November.

However, even a 21-month life expectancy for the agreement might be optimistic. The political situation in the former Soviet Union is fragmented and decentralized. Gone are the days when a strong central government would issue a proclamation backed by an iron glove. The former Soviet Union is now a patchwork of small nations, each scrambling to survive economically. Many of them are working with antiquated manufacturing infrastructures in economic systems on the border of collapse.

Aluminum is the one bright spot for these emerging states. They are willing to barter their aluminum for other commodities or cash. Now that they can say they complied with the MOU for at least a while, the Eastern Bloc countries are once again opening up production.

According to the Aluminum Association, Washington, the rate of U.S. primary aluminum production totaled 280,926 metric tons in January. Annualized, that would result in 1995 production of 3.3 million metric tons, a decrease from the 3.4 million metric tons annualized in January 1994, but still above the actual 1994 year-end figure of 3.298 million metric tons.

The daily rate of production in January 1995 had dropped to 9,062 metric tons, compared with 9,436 in the pre-MOU month of January, 1994. But that was up from the average daily production for the fourth quarter of 1994, which was just 8,993 metric tons. Throughout the fourth quarter, however, average daily production had been creeping upward.

David Fink, treasurer of Allied Metal, Chicago, says the market in his area of the country is beginning to soften. "Pricing is following the London Metal Exchange, a good indicator for future trends," he says. Allied does almost no business in the used beverage container market, focusing instead on cast and sheet, clips and turnings.

Ken Curcio, metals trader with J&J Metals, Newark, N.J., agrees with Fink on the trend. "However," he notes, "we have to be realistic with the price drop. In early March scrap prices are only about 10 cents off all-time highs. How bad is that?

"I can remember aluminum prices of 19 cents per pound at the mill. We’re a far cry from those horrendous values. People looking at market prices need to check their references...today, old sheet at 58 cents to 60 cents a pound is a lot better than 19 cents. There is a bit more there to cover costs."

"One thing that hits me in the face with aluminum scrap is that sheet continues its tremendous increase," says Edward Pchola, vice president, operations, with Alcan Recycling, Cleveland. He notes the figures were up 50 percent in 1994 over 1993. "Don’t forget that a good part of that market is in exports," he adds.

Likewise, Maurice Berglund, nonferrous market officer for Sadoff Iron & Metal, Fond du Lac, Wis., says the market has to be kept in perspective. Berglund says he feels the fundamentals are all in place but the day-to-day market is scary. "Predicting prices is an educated crap shoot," he says. "You don’t know what will happen with the funds manipulating the market’s ups and downs. None of this makes sense when you compare it with the fundamentals."

He sees the MOU going by the wayside as more production comes on-line to meet continued demand. "Europe and Japan are hot markets," he notes. "This whole market has me frazzled."

Though virtually all players in the aluminum industry closed their 1994 ledgers with big smiles on their faces, domestic scrap consumption did not see the same increases posted by either primary sheet mills or secondary smelters. According to ISRI estimates, purchased aluminum scrap totaled 3.9 million tons in 1994, seven percent above 1993. If those preliminary figures prove accurate, scrap’s share of the market will have fallen slightly last year to 40 percent, compared with 1993’s share of 41 percent.

But the forecasat for used beverage containers remains strong.

Last year 102 billion aluminum cans were produced. About 67 percent -- 450 million pounds -- actually came back through the recycling stream to be shredded, melted and recast, even though only 11 states have deposit laws.

Bulk UBCs were bringing between 68 cents and 72 cents per pound in early March, down a dime from 1994 year-end prices. In early March, at the consumer level, Anheuser Busch Recycling, St. Louis, was paying 42 cents on lots under 100 pounds and 45 cents on lots over 100 pounds.

Citizen recyclers have done much better over the past year, as prices have leapt from 20 to 25 cents up to the 50 to 60 cent range in some parts of the country. In addition, consumption has been higher. There was a seven-to-eight percent increase in aluminum soft drink can consumption last year, and a somewhat smaller increase in beer consumption. This all adds to the recycling stream.

Aluminum beer containers are facing renewed competition from glass, and that accounts for some of the flatness in the beer can market. Still, UBCs are coming to mills in near-record numbers.

According to figures from The Aluminum Association, 162,698 pounds of aluminum cans were reclaimed in January of this year, up 40 percent over 1994 figures.

Mills seem quite comfortable with the supply of UBCs coming through the gates. "You’re not paying anyone to bring them into the mill anymore," Curcio says. And, although he describes the overall market as "very, very soft," he notes that the fundamental supply is good. He believes there is a floor around $1,700. Other observers generally agree that the fundamentals point to a price in the $1,600 to $1,700 area. The fact that investors and funds account for between 20 percent and 30 percent of the market adds to volatility.

Several market observers note that speculators could tire of the action in the aluminum sector and take their cash elsewhere, effectively pulling the rug out from under the market. There would be no crash, however, since market fundamentals are solid.

ISRI says another partial explanation for the price fluctuation may be the amount of imported aluminum last year. Scrap processors note that imported material — including mill products, ingot and scrap — proved to be a significant metal competitor last year. "Some assert that Russian imports of sheet, plate and ingot were actually scrap," ISRI’s Garino says. This is no small point. Last year, the former Soviet Union imported 648,000 metric tons of aluminum...a 50 percent increase over comparable 1993 figures. This, say some recyclers, helps explain why scrap supplies seemed more than adequate to satisfy U.S. and foreign purchases, despite robust demand.

There is strong demand on both sides of the U.S.-Canadian border, according to Alcan’s Pchola. Alcan’s Shelbyville, Tenn., operation processes 40,000 metric tons of aluminum a year while its Guelph, Ontario, operation does 70,000 metric tons. "The aluminum market is still perking along," Pchola says. "UBCs, automotive and durable scrap have seen a mild winter. There were no hiccups in supply this past winter."

Will this steady supply mean demand will even off as summer approaches? Pchola points out that everyone is running at capacity.

"It remains to be seen if there will be a leveling off," he says, adding that demand remains strong. "Look at global demand and it shows LME warehousing continues to decline, right through the March 7 figures."

"The UBC market will follow the LME," Berglund says. This spring, mills were full of cans. Berglund credits that to the relatively mild winter across much of the country. There were no problems getting cans to the mills. He sees UBC prices following the LME and dipping slightly.

Overall scrap supply coming out of the winter months was healthy. Berglund says February was a good month and demand was good, despite the fact that some big secondary ingot, sheet and coil buyers were being cautious about placing major orders. With the expectation that prices could continue to slip, they remained reluctant to commit too heavily in a market where the possibility of price drops would make a major difference in materials costs.

Demand on the can side and for building sheet also is good.

"Everyone is wondering what the next twelve months will bring," Hutton says. "The current economic expansion is relatively mature — it is in its 45th month (as of February), while postwar expansion has averaged 40 months." He says that overall capacity utilization is at least 85 percent, which many regard as approaching a danger zone. "This capacity ceiling will inherently limit economic growth."

For the fourth consecutive year, total domestic aluminum industry shipments increased; and, for the third straight year, set a record. Shipments rocketed 6.4 percent to 19.5 billion pounds in 1994, but might just stay at that level in 1995 or decline slightly, he says.

Allied’s Fink says that he expects July prices to be a dime to 15 cents lower than early March prices. "It’s just a guess," he notes, "but end-users are keeping busy, so supply should remain good."