Aluminum: An Industry Subject to Ups and Downs
The U.S. metals industry has recently experienced turbulent times, as unpredictable prices and profits have fallen due to the impact of the economic recession. The aluminum manufacturing industry in particular, has experienced a roller-coaster ride over the past few years, as the market has been difficult to predict. With margins closely tied to other industries, the market is expected to recover as we rise out of the current global recession. Standard & Poor’s estimates that the metals and mining industry is well positioned to benefit from economic recovery as well as higher metal prices that are expected in 2010.
SUPPLY
Suppliers keeping inventory levels low
Volatile pricing of aluminum has increased the risk for suppliers and many are responding by cutting inventory by as much as 20-30%. The London Metal Exchange (LME) reported that aluminum inventories at the end of 2009 totaled 279,000 tons, or approximately 3.5 months of supply, which was 21.7% lower than 2008 levels. Some industry experts believe that the price volatility is the effect of speculation rather than physical market conditions.
New global investments increasing output
Industry leaders are currently looking to rise out of the slump experienced in 2009. Alcoa Inc. (Alcoa), which controls about 34% of the market share for aluminum manufacturing, posted a net loss of $277 million on sales of $5.43 billion during the fourth-quarter of 2009. The company has recently stated that they will cut capital expenditures by more than 20% in 2010. Another industry leader, Century Aluminum (Century), saw its sales fall 36.1% and posted a net loss of about $24.4 million over the same time period. Century’s loss was largely attributed to debt modification and the purchase of downside aluminum price protection for a portion of Century’s U.S. production in 2010.
Analysts are forecasting a 10% boost in world aluminum consumption demand in 2010, but Alcoa is predicting that new smelter production will outpace the spike in demand, resulting in a 1.2 million-ton global surplus for the coming year. Some manufacturers, such as Novelis Inc., are increasing their investments in developing nations in order to improve output among the world’s growth markets.
U.S. aluminum output expected to slightly increase in 2010
The U.S. primary aluminum output is expected to rise to 1.9 million metric tons in 2010, up slightly from 1.8 million metric tons in 2009. The secondary market will also see a minimal increase to 3.3 million metric tons in 2010 from 3.2 million metric tons in 2009. Some of the domestic smelter capacity that was idled in 2008 and 2009, such as Glencore’s Columbia Falls, Montana operation, are unlikely to be restarted, which will put a cap on aluminum output. However, with global growth expected over the long-term, a range of industries, including construction, car production and packaging, will have higher demand for aluminum. Most of the surges in output will be seen in the secondary market, which is less expensive to produce.
DEMAND
Declining construction sector keeping demand flat
Although many industry analysts predicted a recovery for the aluminum market in 2010, demand has remained mostly flat through the first quarter of the year. The aerospace and transportation sectors have been holding up, but the construction sector, which usually accounts for about 40% of total aluminum extrusion demand, continues to struggle due to the distressed economy. Many projects have been delayed due to insufficient funds, while some on the East Coast have been halted due to inclement weather in many Mid-Atlantic regions. The number of new single family housing starts has declined every year since the peak of about 1,715,800 starts in 2005; 2009 saw only an estimated 430,000 new housing starts. However, with analysts projecting a gradual recovery of the economy as well as a slowdown in mortgage foreclosures and move toward more affordable housing options, the current downward trend in housing demand is expected to be reversed in the near future.
Transportation sector showing signs of a market turnaround
Growing demand for aluminum in the transportation sector could be a sign that market conditions are improving. The commercial transportation sector has recently started to increase its reliance on lightweight aluminum in order to meet fuel consumption regulations that have become more stringent in recent years. The tractor trailer market has started to see a moderate resurgence in the beginning of 2010 and analysts believe that this could be an indicator that the economy is improving.
Long-term outlook foresees demand increases
The demand for aluminum will continue to be closely linked to levels of economic activity, which is expected to recover from the continued downturn that was seen in 2009. Demand conditions are anticipated to stay weak through 2010, then moderately expand over the long-term. Demand from key industries, such as packaging, construction, motor vehicle and aerospace, is projected to increase over the period of 2011 to 2015. During this same period, industry revenue is projected to increase at an average annual rate of 5.5%, with profits expected to rise by approximately 6.7% annually.
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