Falling into line

Aluminium markets have endured significant struggles since the recession that began in late 2008. But these days, while many Western European economies are still seeing tepid growth, there is a more positive outlook for aluminium markets. This growing optimism is being heavily driven by signals that the transportation sector, especially the automotive side, will become a much larger consumer of aluminium in the years ahead.

While the increase in the use of aluminium for automobiles will truly kick in toward the end of this decade, a number of primary and secondary aluminium producers are expecting to see far healthier markets for the metal in 2015.

The improvement is coming while China, which holds great influence over the global aluminium market, continues to struggle with a slowing economy.

Uncertainty over the short-term market for aluminium is reflected in the fairly cautious outlook being expressed by many European aluminium firms.

In a recent Bloomberg interview, Svein Richard Brandtzæg, president and CEO of Norsk Hydro, one of the largest European aluminium producers in Europe, said his company has decided to delay restarting any of its idled aluminium plants and would hold off on investing in new capacity.

The company, headquartered in Oslo, Norway, with a fairly significant aluminium recycling and remelting business in Europe, has been one of the biggest drivers for reducing capacity. Since the end of 2008 the company has cut an estimated 30% of its aluminium production.

Despite the decision, Brandtzæg, in the Bloomberg article, added that the “balance in the market is much more attractive from our point of view than it’s been for a long time. We will be very careful building new capacity going forward,” he said.

These moves are reflected as world aluminium demand outside of China is estimated to grow between 3% and 4% in both 2014 and 2015. The improvement, Brandtzaeg added, is broad-based and includes transportation and electrical sectors.

Despite the recent rough patches, Brandtzæg inidicates in his interview that improved primary aluminium supply and demand balance has created conditions where sustainable profitability can emerge. He acknowledged that there is still considerable aluminium in inventory, Europe’s economy is still wobbling and that Chinese producers have increased their export levels of aluminium semis and fabricated items.Nonetheless, he tells Bloomberg, “The fundamental situation is looking much better than only a year ago.”

For his company’s shareholders, the Norsk Hydro CEO is optimistic that market fundamentals will soon be better able to create positive earnings.
 

Upside in automotive

A recent report by the consulting and research firm Ducker Worldwide notes that over the next decade in North America, around 18% of all vehicles will have all-aluminium bodies, compared with about 1% at the present time.

In Europe, the aluminium industry is expected to see similar gains in the auto sector. John Mothersole, an analyst with the firm IHS, says Europe, Japan and South Korea will all see great inroads made by aluminium producers into the auto sector. Even the auto industry in China, which is very fragmented, wants to be seen as more green and will show growth in the use of aluminium. “It all goes toward lightweighting the vehicle,” Mothersole points out.

The possibility of significant growth in the auto industry has generated tremendous enthusiasm for the global aluminium industry. In Europe, as in North America, car makers are announcing ambitious plans to increase their use of aluminium for the future.

The Ford F150 truck, produced in the United States, has generated a significant amount of interest in light of Ford Motor Company’s decision to convert a significant amount of its body to aluminium. In Europe, there also have been recent announcements about the increased use of aluminum in car bodies. Novelis recently announced it would supply aluminium sheet for Jaguar Land Rover’s recently launched Jaguar XE.

Novelis says the vehicle, launched in Europe in the fall of 2014 and arriving in North America in 2016, is the first vehicle in the midsize segment to feature an aluminium-intensive body structure.

Additionally, Novelis points out the new Jaguar XE is the first all-new car in the world to use a new, high-recycled-content aluminium alloy designed jointly by Novelis and Jaguar Land Rover for the automotive industry.

Going further, the two companies say they will extend their positions as leaders in sustainability by using high recycled-content alloys on all future Jaguar Land Rover platforms.

Mothersole says the automotive market is the “holy grail” for many aluminium producers. The use of aluminium in cars is expected to increase by close to 10% per year through the rest of this decade.
 

Rationalising capacity

While capacity rationalisation throughout North America and Europe over the past five years has removed a significant amount of capacity from the global market, Chinese aluminium producers have been more reluctant to cut capacity. The result is that at the present time Chinese primary aluminium production stands at around 22 million tonnes per year, which makes up around 46% of the global aluminium market, a sharp increase from 1990 when China’s share stood at around 4%.

While aluminium producers throughout the developed world have significantly cut capacity over the past five years to reduce global overcapacity, the resistance by Chinese aluminium producers to make meaningful cuts to their own aluminium production has allowed the country to take advantage of the market.

“They are essentially a free rider,” says Mothersole. To truly bring a balance to the market, China will have to bring its aluminium production back into line, he contends. Mothersole adds that while it is easy to track capacity cuts throughout the developed world, determining what has taken place in China is “the big unknown.”

China is far less dominant in the secondary aluminium sector, although the country still has a sizable position in the global market, estimated to be around 9.2 million tonnes, or roughly 20% of its total aluminium production. That figure, Mothersole notes, has been fairly stable over the last several years.

Also echoing the growing bullishness in the aluminium market is Rusal, one of the largest aluminium producers in the world. In reporting its fiscal third quarter in November, 2014, Oleg Deripaska, CEO of Russia-based Rusal, said significant capacity reduction outside of China has begun to affect aluminium markets.

While Chinese aluminium smelters have not been as aggressive in reducing the overhang in the market, Rusal’s CEO says the growth in China’s capacity is slowing. “As expected, higher prices will not incentivise marginal producers to significantly restart capacity in the coming years,” Deripaska says in the third quarter report from Rusal.

Although there has been new capacity coming online in China, there still is a significant amount of capacity that remains idled, Deripaska says. While total aluminium production in China for the first nine months of 2014 rose by 11.6% to 20.7 million tonnes, Chinese officials are reportedly seeking to restrain the growth to lessen overcapacity.

These efforts are already having an impact. According to the China Nonferrous Metals Industry Association, China’s fixed-asset investments to grow the aluminium markets, whether primary or secondary, have decreased by 33.9% for the first eight months of 2014 compared to the same time in 2013.

A recent report from Morgan Stanley says aluminium supply growth in China is finally starting to slow. While strong demand growth in China, estimated at a compounded rate of 15%, has hampered global prices, Morgan Stanley says that more recently approvals for new smelting capacity in China have stopped.

To those skeptics who fear that any rebound in aluminium demand will result in Chinese smelters firing up idled capacity, Morgan Stanley’s report says the startups are price-sensitive and driven by aluminium price recovery. While skeptics say China could start dumping aluminium on the global market, strong domestic demand growth is expected to limit exports. China’s domestic demand growth is expected to exceed 10% in 2014-2015, limiting exports and driving a tight supply demand balance in the rest of the world.

The cuts in capacity are finally starting to take hold. Aluminium stocks at London Metals Exchange warehouses have been steadily declining, with the LME reporting that inventories in the middle of December were down to their lowest level since early January. some observers say they have fallen to their lowest level in more than three years. This trend, several metals analysts forecast, will continue.

Mothersole says that with all the moves recently, “By my estimate, when I look at the industry, the capacity utilisation rate is below historical levels. The market outside of China is in deficit.”

On the export side, handlers of aluminium scrap in Europe should see demand for the metal remain fairly robust due to growing secondary aluminium capacity in both India and China. A report prepared by the European Commission Joint Research Centre addressing regulations regarding end-of-waste criteria for aluminium scrap and ferrous scrap, notes that China is expected to increase its secondary aluminium production to 15.7 million tonnes per year within the next five years.

And, the report notes, a large portion of the scrap needed to feed this new capacity will have to come from outside of China.

The author is senior editor of Recycling Today Global Edition and can be reached at dsandoval@gie.net.