Sourcing offshore aluminum: No big savings expected in 2008
Buying aluminum from foreign sources won't be much of a price deal in 2008. The weakening dollar has put upward pressure on prices of ingot and mill products made offshore.
By Tom Stundza -- Purchasing, 12/13/2007 2:00:00 AM
Substantial purchasing of aluminum mill products from sources outside North America has been a fixture of the marketplace since 2002. Offshore sourcing has increased in recent years—rising almost 4% this year alone to 898 million lbs—and foreign supply is growing. But, the weaker dollar means buyers won't save much by buying overseas.
Foreign trade in mill products could become the victim of uncertain need and the declined value of the dollar that will keep global ingot above $1.10/lb. "It's a fairly pessimistic demand outlook," says Parks Dodd, president of Aluminomics, an Atlanta aluminum research firm, who recently told an industry meeting that he's "not looking for 2008 to be much of a year."
Albert Bakker, purchasing manager at LynRus Aluminum Products, in Salt Lake City, has purchased aluminum from outside the U.S. and Canada for some time "because the landed price has been favorable" for use by his machine-shop company. He is just one of the thousands of buyers who have been sourcing outside North America this decade. In fact, 70% of the buyers who answered a recent aluminum-buying survey source materials outside the U.S. and Canada. However, Michael Swanson, economist at Wells Fargo Bank in Minneapolis, says "the weaker dollar represents an imported-product inflation challenge" that will cause buyers to turn back to the domestic sources.
Aluminum is a global product because production technology is universal with local costs based mostly on regional energy differences. Spot and futures prices discussed worldwide are for the main product, primary ingot, and are set in daily trading, mostly on the London Metal Exchange (LME) and the Comex division of the New York Mercantile Exchange (Nymex).
This year, ingot production is on pace to increase 34% to 52 million metric tons. In fact, 30%–35% of the ingot used to make downstream products in North America come from foreign smelters.
It is widely assumed that most of those ingot plants are in China. However, while China is the world's largest producing region, export-tax increases in late 2006 by the Chinese government put a damper on 2007 ingot sales to other countries. Interestingly, while conventional wisdom points to China as a major source of offshore-made aluminum, U.S. buyers actually source primary aluminum predominantly from Russia, Venezuela and Brazil, followed by European Union, Australia and New Zealand, Norway, South Africa, Bahrain and the United Arab Emirates, and India.
Industry insiders such as Rio Tinto CEO Tom Albanese believe China's rapid growth in smelting capacity—up around 12.5 million metric tons next year—won't keep up with its soaring demand for the metal, forcing the country to reduce exports in the future, which will lead to higher world prices. China's consumption of aluminum has grown so rapidly in recent years that it already represents close to one-third of global demand. To date, production has also risen to the point where China remains a net exporter but Alcoa CEO Alain Belda has forecast that China could become a net importer in 2008.
Albanese—whose London-based firm recently spent $38 billion to buy Montreal aluminum maker Alcan—says that may be because China's production expansion soon will be restricted because of a depleted resource, affordable electrical energy. An analysis by Merrill Lynch & Co. in New York also says China's aluminum producers may have to pay up to five times more for electricity to fire plants than overseas competitors by year-end 2007.
Actually, a new Purchasing survey of aluminum buyers finds only 26% purchasing ingot from foreign sources. Twice as many of those who buy ingot directly use foreign smelters rather than purchase from brokers or traders. That's interesting and hard to explain since, globally, there is plenty of aluminum ingot available in stockpile—more than a million metric tons in various exchange warehouses, or 9.8 weeks of global supply.
Part of the reason may be aggressive worldwide marketing campaigns by producers of ingot who actually are expanding potline capacity this year and next. Smelters with 180,000 metric tons of capacity have been fired up this year in Russia and some previously idled smelters in the U.S. have been restarted. Next year, Russia is expected to increase output by around 400,000 metric tons, as United Company Rusal's Komi smelter is commissioned. There are other smelters being commissioned in India, adding 115,000 metric tons; in Oman, adding 350,000 metric tons; and Venezuela, adding 143,000 metric tons.
Offshore mill product sourcing is disjointed
The trade picture isn't as focused when it comes to fabricated mill products—sheet and plate, foil, extrusions, forgings and impacts, electrical conductor, and wire, rod and bar. The Purchasing magazine survey of buyers finds a majority only source up to a tenth of their annual aluminum products buy from offshore sources.
"We only buy small quantities offshore; we buy mostly domestic," says Mike Branigan, the vice president of corporate purchasing at the Macsteel Service Centers USA metals distribution firm headquartered in Newport Beach, Calif. Similarly, John Davis, corporate purchasing manager at metal signs producer Stout Industries in St. Louis, says he buys less than 10% of his total aluminum purchase offshore. "We already have contracts in place for 2008 supply mostly with domestic mill suppliers."
In an attempt to lure buyers, there have been some product-mix configurations and plant expansions in North America such as the Kaiser Aluminum program to spend $140 million on enhanced rod, bar and tube production facilities at a new plant in the Midwest. And there is no clear picture of offshore sourcing ahead since the aluminum market outlook for 2008 for all suppliers, foreign and domestic, is cloudy.
The Aluminum Association says the major markets for mill products are bunched into three groups: building/construction, automotive/transportation and packaging/consumer products. Looking forward, none of these markets will be booming, according to aluminum industry economists, who forecast an economic growth rate of 2.1% for the second year in a row in 2008.
The aluminum economy is looking a little shaky due to the housing slowdown, credit worries, the sliding dollar and other factors testing consumer confidence. And it is consumer spending that drives most of the aluminum market. So, the regional use of the light metal in all shapes and forms is forecast to decline by 4% next year.
Ingot glut will keep prices depressed
World aluminum production growth has generated 35% global growth in inventoried ingot partly because consumers have enough in-house metal to allow them to buy ingot only on price dips, says analyst David A. Lipschitz at Merrill Lynch & Co. in New York. So, aluminum prices are expected to remain relatively low through next year, he says, as production will continue to exceed consumption—even though 2008 world use is forecast to increase by almost 7% to 40.2 million metric tons.
If that happens, then prices will stay weak globally. For the year 2007, analysts at J.P. Morgan Securities in London downgraded the forecast in mid-November for the world ingot price average to $1.20/lb—then dropping to $1.05 in 2008. Of course, the 2008 price could inflate if speculators and fund managers continue to target commodities for their investments.
It has been discounted pricing by offshore mills over the past two years that, has been the number-one reason behind this decade's surge in North American imports of the light metal. Just this year, the world price for ingot, set by daily trading on the LME, has slipped to $1.13/lb in the fourth quarter from an average of $1.34 in the first quarter.
"We have outsourced the majority of our aluminum outside, primarily for better pricing," adds Bill Sweet, director of global sourcing at Masco's American Shower & Bath subsidiary in Moorestown, N.J., a producer of do-it-yourself bath and shower products. "Foreign purchases allow us to supplement our domestic purchases so we can compete in product areas that traditionally have lower margins," says the chief buyer at a metals processing firm in the Midwest. "We see opportunities to buy directly from foreign mills for flat-rolled products—thus cutting out the middleman-costs associated with the traders."
Federal Reserve Chairman Ben Bernanke acknowledged in congressional testimony last month that the falling dollar and stratospheric crude oil pricing "has potential to raise import prices and contribute to inflation." And, as the greenback has lost value against key foreign European and Asian currencies, there have been increases in the foreign transaction prices of imported aluminum mill products.
A year ago, when common alloy aluminum sheet cost $1.90/lb in the U.S., the comparable Grade 2003 product cost the equivalent of $1.43 in the Euro currency in the 15-member European Union. At the start of November, with aluminum sheet still selling here around $1.90, the dollar-denominated cost from European suppliers in Euros was equal to $2.79.
"Indeed, there had been a pricing advantage in buying value-added products offshore," says Bob Sutter, a vice president at motor vehicle body components maker L&W Engineering in Middlebury, Ind. "But now, with the dollar sinking, we are scaling back our foreign sourcing and moving predominately to domestic supply once again."
Still, ARC Wireless Solutions of Wheat Ridge, Colo., is one of those firms that will continue to purchase aluminum primarily from outside North America. Mike Maness, vice president of operations at the manufacturer of wireless components and network products and accessories, explains: "We have operations overseas and it doesn't make sense from cost and leadtimes viewpoints to purchase in North America and ship overseas."
| Year | China | Rest of Asia | North America | Latin America | West Europe | East/Central Europe | Oceania | Africa | Total |
| * six-month numbers Source: International Aluminium Association |
|||||||||
| 2003 | 5.55 | 2.48 | 5.50 | 2.28 | 4.07 | 4.00 | 2.20 | 1.43 | 26.05 |
| 2004 | 6.69 | 2.74 | 5.11 | 2.36 | 4.30 | 4.14 | 2.25 | 1.71 | 27.57 |
| 2005 | 7.81 | 3.14 | 5.38 | 2.39 | 4.35 | 4.19 | 2.25 | 1.75 | 29.52 |
| 2006 | 9.35 | 3.49 | 5.33 | 2.49 | 4.18 | 4.23 | 2.27 | 1.86 | 31.35 |
| 2007* | 9.19 | 2.76 | 4.19 | 1.90 | 3.19 | 3.30 | 1.73 | 1.36 | 26.26 |
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