A Bright Outlook

Unprecedented consumption growth as far as the eye can see,” said Tom Akers, president of Metals Exchange Corp., St. Louis, Mo.

While this was among the most bullish statements made during the Platts Aluminum Symposium, held in Fort Lauderdale, Fla., Jan. 15-17, others expressed similar optimism about aluminum markets for the next three to five years.

Acknowledging a number of short-term challenges, most presenters said they saw the improving U.S. economy, rapidly accelerating economies in developing countries (especially China) and the improvement in the transportation sector as key indicators of better markets.

First, however, the industry has to get past murky short-term conditions that have created temporary overcapacity in the market, leading to production cuts. A key drag on the market is concern about European sovereign debt.

Reflecting the bearish short-term outlook, Pittsburgh-based Alcoa has announced plans to cut its global production by 12 percent in response to sharply lower prices. The cuts are being made at facilities in the U.S. and in Europe. Alcoa said prices have dropped by more than 25 percent from earlier in 2011.
 

Falling Prices
The price drop was another key concern cited by some speakers, though many of them shrugged off the long-term implications. Jorge Vasquez, managing director of the Aluminum Intelligence Unit for Harbor Commodity Research, a Texas-based consulting firm to the aluminum industry, estimated that roughly 29 percent of global capacity was underwater at today’s price, with about 70 percent of the unprofitable capacity in China and Europe.
 

Reflecting how significant the overcapacity was, Vasquez said even though significant production cuts have been announced, a large amount of additional capacity remained to be eliminated. “Smaller cuts could be coming,” he added.

Agreeing with what many other industry observers have been saying, Vasquez said, looking at price volatility over the past year, it was apparent investment funds have been a key factor. As disconcerting as the price drop was during the third quarter of 2011, prices still were up for the year. “Funds shorted the aluminum markets,” Vasquez said.

Despite the sharp drop in prices seen during the second half of 2011, Vasquez said the level of fear has declined in the United States and Asia. This translates into improved consumer confidence, which bodes well for a more sustainable recovery, he added.

“In a certain way, fear drives demand for aluminum and prices,” Vasquez said. “And, while fear levels have declined in the United States and Asia, they have climbed in Europe. This is reflective of the continued concerns with the European economy.”

He added, “In spite of the spike in fear and the heavy destocking that took place during the end of last year, the primary aluminum market experienced a small deficit, which was driven by China. With no expansion slated for the North American aluminum industry over the next four years, there could be a growing aluminum deficit seen in North America, with market deficits widening over the next year.”

Akers, who voiced the most bullish outlook, added that total aluminum consumption could double during the next 15 years, with most of the growth coming from developing countries. “Per capita consumption growth in the developing world will trump everything in the long run,” Akers predicted.

Gregory Wittbecker, vice president of marketing for Alcoa Materials Management, Knoxville, Tenn., said despite the seemingly bleak macro-economic news, aluminum markets were fairly strong last year. At the close of 2011, China, which was in a structural deficit of aluminum, balanced a surplus of aluminum produced by the rest of the world.

Issues such as the sovereign debt in Europe, the earthquake in Japan, inflation in emerging markets, energy and infrastructure shortages in India, and weak energy export revenues in Russia have cast a pall on the aluminum industry, though there are enough positives to buoy the outlook for aluminum markets during the next three years.

As for 2012, Wittbecker forecasted a moderately slower pace, with growth at less than 10 percent. The big drag, he added, would be Europe.

Wittbecker also concurred with Vasquez’ outlook that a sizable number of aluminum smelters in China are “operating underwater at the end of 2011.”

Gordon Hamilton, vice president of metal management, Rio Tinto Alcan, Montreal, echoed Wittbecker’s remarks, saying, “2011 was not a bad year at all.” He added, “GDP (gross domestic product) is expected to grow 2 percent in 2012 versus 1.8 percent in 2011.”
 

Unlocking the Key
Despite the challenges arising out of Europe, economies in the U.S. and China and other emerging countries have rebounded, helping propel aluminum markets. “The long-term fundamentals remain positive,” Hamilton said.

The key drivers, he added, will be the rapid urbanization and industrialization of emerging economies, which will require a tremendous amount of aluminum to meet structural needs.

“China is the key to the aluminum industry,” Hamilton continued. “The country accounts for around 42 percent of the global aluminum demand, and that number could rise to 52 percent with the [continued] urbanization and industrialization of the country.”

Patricia Mohr, vice president of economics for Scotia Capital, based in Toronto, noted that, in addition to demand growth, there were no expansions scheduled in North America, which should help to keep aluminum supply and demand in balance.

As for China, Mohr said social housing—buildings built by the government—would continue to grow, which would strengthen aluminum markets. In her symposium presentation, Mohr said China had been growing at double-digit rates since 2009. And, despite a sense that the Chinese economy is overheating, Mohr said she felt authorities would be able to pull off the trick of slowing the economy without it stalling out.

Hamilton agreed, noting that Chinese authorities should be able to engineer a soft landing and keep inflation in the country under control. “Long term, I have a positive outlook,” Hamilton said. “Cost and curtailment will be a key.”
 

Consolidation Opportunities
With the outlook for aluminum gradually improving, thoughts are turning to the possibility of more mergers and acquisitions (M&A) in the sector. While M&A activity slowed in late 2011, Peter Matt, managing director for Credit Suisse, based in New York, said he saw the landscape changing.

“Conditions are ripe for mergers and acquisitions over the next three years,” Matt said. “CEOs have high confidence, balance sheets are good and treasury rates are near an all-time low.” In further support of M&A possibilities, Matt said premiums had come down. “S&P (Standard & Poor’s) trading multiples are also lower than the historical averages.”

Matt said acquiring low-cost production facilities; establishing joint ventures to address significant input costs; focusing on backward integration; and divesting underperforming assets are among the goals of companies seeking M&A opportunities.

Max Layton, London-based executive director of metals research with Goldman Sachs, while acknowledging that a significant minority of Chinese aluminum smelters are losing money on a cash cost basis, said overall growth prospects were upbeat, with China expected to show a 12 percent growth in consumption. “We expect that Chinese inflation will decline, which will act as a stimulant.”

Layton also said he agreed that social housing in China would be a major factor for aluminum during the next five years.
 

A Mixed Bag for End Markets
Domestic end markets for aluminum fall into several camps. The auto and transportation industry are expected to be strong drivers for aluminum going forward, while the building and construction industry may see further challenges.

Tom Schaebel, CEO of Alexandria Extrusion Co., Alexandria, Minn., and past chairman of the Aluminum Extruders Council (AEC), touched on end-market developments from his position with the AEC. He noted that a significant portion of the extrusion industry—windows and doors—have encountered challenges in light of the slide in new housing starts.

Highlighting the difficult extrusion market, Schaebel noted that in 2006, more than 4 billion pounds of extruded aluminum were produced; in 2011, that figure dropped to 2.5 billion pounds.

Along with the slump in the U.S. housing sector, the import of extruded aluminum products from China started to grow from roughly 4.7 percent of the U.S. market from 2000 to 2006 to more than 19 percent from 2007 to 2010.

While the building industry will be a challenge, the auto industry holds much greater promise. Brad Soultz, executive committee member of the Aluminum Association’s Aluminum Transportation Group, pointed out that better fuel economy, improved safety and enhanced performance are helping increase the use of aluminum in automobiles.

Soultz said a survey of the North American auto industry, performed by Ducker Worldwide, revealed that aluminum use in automobiles showed an average increase of 7 pounds per year for the past 35 years. The survey forecasts an average of 343 pounds of aluminum per vehicle in 2012. The figure is expected to increase to 400 pounds per vehicle by 2015/2016 and to 550 pounds by 2025.

Less Promising
While the overall aluminum industry holds great promise, Larry Snyder, executive vice president of nonferrous, North America, for Sims Metal Management (SMM), based in New York, said that secondary smelters in North America have not invested in new technology. Meanwhile secondary smelters in China have some of the most sophisticated equipment in operation. Furthermore, Snyder said, since 1970 a significant percentage of the secondary smelters in North America have closed, removing 376 million pounds of capacity.

Snyder estimated that SMM now moves hundreds of millions of pounds of aluminum overseas in the form of zorba, “which we didn’t previously do.” Prior to 2000, almost all zorba the company generated was shipped to domestic sources. However, less than 1 percent of the zorba SMM makes now stays in the U.S.

China’s Sigma Metals takes in about 30,000 tons of zorba monthly, Synder said. While the smelter is modern, manual labor is used to further sort the zorba.

As more shredders are brought on line (creating zorba), this will further reduce the supply of other aluminum scrap grades available to domestic secondary smelters, Snyder said. As well, manufacturers are becoming more efficient, leaving less industrially generated scrap. In conclusion, Snyder said, for secondary smelters in North America seeking scrap, “the future is going to be tough.”

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