Higher horsepower

The direction of pricing in the metal and minerals portion of the commodity market in 2015 was almost uniformly downward. Although aluminum was not an exception to this trend, the light metal has shown comparative strength in its pricing, thanks largely to its growing role in the automotive sector.

Demand for finished and semifinished aluminum, as well as for scrap and other feedstock to make aluminum, has thus far kept its momentum into 2016, a testament to the metal’s fortitude in the face of widespread woes in the global commodities market.

The aluminum industry, however, is not without its challenges, including those pertaining to overcapacity in other parts of the world (specifically China)—which also has plagued the steel industry—as well as the struggles of the Chinese economy, which is considered the leading factor in copper’s downward price spiral.

Compared with the steel and copper sectors, aluminum producers tend to foresee a healthier near-term future, especially if the demand for cars and trucks in the United States and worldwide continues apace.

THE RIGHT DIRECTION

Aluminum is used in a wide variety of applications. Although no single end market is dominant, transportation is the No. 1 consuming sector, according to 2014 global statistics from Statista, www.statista.com.

The transportation sector’s leading share is just 27 percent, followed closely by the construction and building products sector, which consumed 25 percent of the aluminum used to make new products in 2014.

That 27 percent end market sector can be critical particularly to the scrap industry, however, because the aluminum made by many secondary aluminum producers is used to manufacture auto and truck components.

Aluminum scrap traders and processors report seeing healthy demand from such secondary producers for aluminum scrap. “Domestic demand is strong and seems to be picking up as we enter February,” says Stephen Moss of brokerage firm Stanton A. Moss Inc., Bryn Mawr, Pennsylvania.

“For the moment, it definitely feels like we have shifted from a buyer’s market to a seller’s market,” says Matt Kripke of Toledo, Ohio-based brokerage Kripke Enterprises. However, Kripke is unconvinced that scenario will stay in place. He characterizes demand as “lukewarm,” adding, “As soon as supply picks back up, I anticipate it will be difficult to place metal again, like most of last year.”

Kripke’s concerns could stem from multiple sources, but one foremost worry is the notion of a repeat performance of what has plagued the steel industry: the continuation of massive finished metal production in China at a time when internal demand in that nation is waning.

The overcapacity situation in China’s steel industry has had dramatic negative impacts on the world’s steel producers (and the ferrous scrap market), and aluminum producers and their trade groups have been sounding the alarm about the parallels in their market.

AN UNWANTED COMPARISON

The Aluminum Association, headquartered in Arlington, Virginia, has a Web page within the “advocacy” section of its website, www.aluminum.org, devoted to the issue of “China & Trade.”

The association expresses concern that much of China’s newly added aluminum production may have been commissioned hastily (and thus unnecessarily) and may not be legitimately competitive on the world stage.

“Much of this expansion was driven by artificial incentives, subsidies and central planning by the Chinese government,” the trade group says. “This behavior led to smelters being built even when doing so made little economic sense. Indeed, of the 50 highest-cost aluminum smelters in the world, 37 are in China.”

In March, The Aluminum Association announced a new coalition of U.S. trade groups that opposes China’s designation as a market economy at the end of 2016. Manufacturers for Trade Enforcement’s (MTE’s) position statement declares, “Fair international competition and a level playing field are essential for the global competitiveness of U.S. manufacturers. Effective and predictable trade enforcement mechanisms must include the accurate assessment of and response to distortions from state-run or other nonmarket economies, which risk endangering U.S. jobs and the economy.”

In the announcement, The Aluminum Association says, “China has claimed that it should be automatically accorded treatment as if it were a market economy after the 15th anniversary of its accession to the World Trade Organization (WTO) in December 2016. U.S. law requires that the Department of Commerce make a market economy status (MES) determination based on established criteria, which many experts agree that China has not met.”

The groups that are united in their opposition to MES for China include:

• Alliance for American Manufacturing (AAM), Washington;
• The Aluminum Association;
• American Fiber Manufacturers Association (AFMA), Arlington, Virginia;
• American Iron and Steel Institute (AISI), Washington;
• Narrow Fabrics Institute (NFI), Roseville, Minnesota;
• National Council of Textile Organizations (NCTO), Washington;
• PET Resin Association, New York; and
• United States Industrial Fabrics Institute (USIFI), Roseville, Minnesota.

State support of domestic manufacturing in China has distorted global markets, leading to significant oversupply and other issues that are hurting domestic manufacturers, according to The Aluminum Association. In the aluminum industry alone, eight U.S.-based aluminum smelters have curtailed capacity or closed since the beginning of 2015, representing more than 60 percent of U.S. primary aluminum capacity and affecting more than 3,000 workers.

In the steel sector, overcapacity in China has had dramatic effects as its own economy has cooled and its pace of infrastructure building and urbanization has slowed. Steelmakers there (many of them state-owned enterprises) have continued to produce steel in volumes way beyond what is required by the “new normal” of the current Chinese economy.

Aluminum producers in America and other parts of the world see this unfolding in China in the aluminum sector. According to The Aluminum Association data, “U.S. imports of semifabricated aluminum products from China grew 115 percent between 2012 through 2014, and this trend is continuing. The current situation is bad for China and bad for the rest of the world,” The Aluminum Association says.

The association’s 2015 statistics, which are published by the United States Geological Survey (USGS), Reston, Virginia, show aluminum imports rising again based on data for the first 11 months of the year.

The U.S. imported 4.22 million metric tons of finished and semifinished aluminum and alloys in the first 11 months of 2015, up 7.4 percent from the 3.93 million metric tons imported in the first 11 months of the prior year.

China was far from the sole supplier of this metal, as it shipped about 365,000 metric tons of the 4.22 million 2015 total. By far the largest supplier of finished or crude aluminum to the U.S. is NAFTA (North American Free Trade Agreement) partner Canada, which sent nearly 2.3 million metric tons (54 percent) of the inbound metal. Canadian producers have been benefiting recently from their weak dollar, which encourages exports to the U.S.

Outside the bounds of that NAFTA relationship, however, China with its 365,000 metric tons shipped, followed by Russia (284,000 metric tons) and the United Arab Emirates (263,000 metric tons) were by far the largest overseas suppliers of finished and semifinished aluminum to the U.S. in 2015.

Aluminum producers in North America certainly can argue that if any of this inbound material was unfairly subsidized, it has reduced their opportunities to boost their own production.

To what extent this damage is significant or lasting drives the narrative in a circle back to aluminum’s end markets, in particular in the automotive and construction sectors.

DRIVING SAFELY

In China, its construction sector is widely considered to be in a comparative recession in relation to the boom years of 2000 to 2013. This cooling in construction has had a major impact on China’s steel consumption, has hampered copper consumption considerably and has had enough of an effect on aluminum to cause its finished metal export spike.

Of help to aluminum producers in China, as in the rest of the world, is the lead role of the automotive sector. While China’s construction sector has waned, the sizable middle class that has emerged in the nation in the previous two decades remains hungry for passenger cars.

It is difficult to describe the growth story of Chinese passenger vehicle sales as anything but impressive. Figures published by Statista show this progression:

• 2008 – 6.76 million;
• 2010 – 13.76 million;
• 2012 – 17.93 million;
• 2014 – 19.71 million; and
• 2015 – 21.15 million.

The numbers show a relative (but not absolute) plateau has been reached compared with the hyper-growth years of 2008 to 2012, but they also portray a large and seemingly established consuming sector for aluminum.

Aluminum producers around the world have several reasons to fear a hard landing for the Chinese economy, with one of the most prominent being a loss of consumer confidence or spending power to keep this market for 20 million vehicles per year going. If China’s automotive sector slams on the brakes, excess finished aluminum inventory and capacity are likely results.

Closer to home, aluminum producers and the scrap processors who supply them also are tied to the fortunes of the North American automotive industry.

As in China, American consumers set a single-year record for auto purchases in 2015, buying nearly 17.5 million cars and light trucks. The figure represented 5.7 percent unit sales growth over the 2014 number and surpassed annual levels reached before the financial crisis of 2008.

The auto market’s buoyancy has helped a number of secondary aluminum producers, including Cleveland-based Aleris Corp. The publicly traded firm announced earnings for its 2015 third quarter that rose 24 percent compared with the third quarter of 2014.

“We delivered a solid quarter driven by increased volume in high-value aerospace and automotive product lines,” said Sean Stack, president and CEO of Aleris, in remarks accompanying the third quarter financial results.

The company indicated that globally its sales volume to the automotive sector rose by 29 percent in the third quarter of 2015 compared with the prior year.

Mexico-based secondary aluminum producer Nemak, which has several plants in the United States and Canada specializing in producing alloys for the automotive industry, reported its earnings increased 8 percent in 2015 compared with 2014.

The company said revenue for its North American operations in 2015 was down 3 percent compared with 2014 because of lower aluminum prices, but it was nonetheless able to increase its earnings in North America last year by 11 percent, “largely due to a better sales mix.”

Many primary aluminum producers have been facing tougher circumstances in 2015 and early 2016, in part because of global overcapacity and lower prices.

Considering the direction of commodity pricing in 2015 and early 2016, the executives and managers who lead aluminum companies have little reason to relax. The challenges of a global market that has worldwide ripple effects doubtless will continue.

The author is editor of Recycling Today and can be contacted at btaylor@gie.net.