Buyers wonder how mergers will affect supply
Demand for aluminum sheet, the largest mill product category, is surpassing expectations this year. Annualized shipping data at midyear suggests full-year mill deliveries of 10.44 billion lb, as compared with 10 billion lb in 1998. Aluminum sheet buying by the automotive, truck trailer, railroad car, construction, appliance, and consumer durables markets, have been stellar.
By Tom Stundza -- Purchasing, 10/7/1999
Aluminum is a hot topic among buyers these days. Prices are rising, supply is tightening, and shortages of some key mill products are appearing. But what's dominating buyer interest is the suddenly changing face of the supply base. While news reports highlight financial aspects of a rash of merger and acquisition activity, buyers at end-use companies and distributors are questioning the potential impact on downstream mill products."The economy is doing well, so our aluminum purchasing is expanding even if prices are rising somewhat," says Gregory Zaccagni at the Omni Products construction products plant in Addison, Ill. In fact, the U.S. aluminum mill products market is sizzling. Use is way ahead of forecasts, and this year is expected to set a record at 17.17 billion lb. Data from the Aluminum Association shows that through July, mill product shipments were 7% stronger and new-order bookings were 6% ahead of the same time last year.
Even if the industrial economy slows its growth rate next year, orders are strong enough that market insiders expect purchasing to expand to 17.59 billion lb in 2000. Orders to mills through July for sheet and plate products were up 12% while foil sales were 8% stronger; extruded shapes and tubing were up 4%; bar, rod, and wire were 48% stronger; forgings and impacts were 29% higher; and powder and paste were 12% stronger. Only canstock bookings (down 4%) and electrical conduit (off 16%) were slower.
Purchasing's latest survey of aluminum buyers finds 70% planning to boost or hold to existing purchasing volume in the fourth quarter. Buyers such as Verlon Warren, purchasing agent at King Manufacturing, a metals fabricator in Corinth, Miss., report that sheet supplies are tighter than usual, especially from distributors. Data from the National Association of Aluminum Distributors (NAAD) show six-month shipments at the same rate as in 1998, which went on to set a record for one-year volume. And there now is talk within the market that service centers will break the supply record of 2.38 billion lb this year.
Going into 1999, aluminum sales execs worried there might be a slowdown in buying by the transportation and construction markets. Obviously, that hasn't happened. While shipments into aerospace have fallen, they have risen to automotive, railroad rail car, and truck trailer markets. "The decline in flat-rolled shipments is due to reduced demand in 1999 for aerospace products, but that has been offset almost entirely by a strong increase in 1999 demand for ground transportation products," notes Raymond J. Milchovich, COO of Kaiser Aluminum & Chemical in Houston.
Despite the weakness in aerospace demand for heat-treated sheet and plate products, total sheet and plate shipments were 8% higher at mid-year than in the first half of 1998. Reason: Purchasing by automotive, appliance, and construction products industries has been healthy. And, according to analyst Tom Van Leeuwen at Credit Suisse First Boston, "Although Boeing's realignment of its supply channels and a downturn in aircraft orders led to sharply lower bookings and shipments of heat-treated plate in the first half, volume is recovering somewhat this half, now that the supply pipeline has been drained of excess plate inventories."
Also note that extrusion demand has been especially strong, with shipments up 6% through July, buoyed by strong construction spending and continued strength in the important truck trailer market. "The truck trailer build rate appears to be on course for another record-breaking year," says Van Leeuwen, "and should stay strong as long as the domestic economy continues to grow at a good pace."
Restructuring is in play
However, the marketplace is preoccupied these days with major mergers and acquisitions. That's because buyers are wondering what all this restructuring is going to mean to supply. "Consolidation has become the buzz word of the late 1990s, replacing downsizing, right-sizing, reengineering, de-stocking, and re-stocking, among others," says Michael Petersen, president of Petersen Aluminum Corp., Elk Grove, Ill., and president of the National Association of Aluminum Distributors (NAAD).
"You really have to be an economic Cassandra to be gloomy about this economy," he says, "but buyers in distribution and the OEM (original equipment manufacturing) need to be a little paranoid about the consolidation because, as Andy Grove of Intel puts it, 'Only the paranoid survive.'"
Buyers surveyed by Purchasing contend that the U.S. market still hasn't adapted completely to last summer's absorption of Alumax into Alcoa of Pittsburgh. Then this summer comes the three-way merger between Switzerland's Alusuisse Lonza, Canada's Alcan Aluminum, and France's Pechiney that will create a new firm called APA, which will be headquartered in New York City, and after that, the controversial buyout of Reynolds Metals of Richmond, Va., by Alcoa. This rash of merger and acquisition activity will allow Alcoa to retain its number-one position worldwide, and make APA a new number two. (See Metals News for more merger details.)
Analyst Nicolas Toffier of Macquarie Bank in London says this merger activity is necessary because of excess smelting capacity, uncoordinated mill product marketing, and erratic pricing. Most analyses have been cautiously optimistic about the demand for aluminum for 1999, looking for an increase in global primary aluminum consumption of only 2%-3%. So Toffier says "aluminum producers worldwide are consolidating to cut costs and weather a decline in ingot prices," which fell to a five-year low in March and eroded industry profits.
However, analyst Victor Lazarovici at Nesbitt Burns in New York says these actions, if successful, actually could produce a better supplier base. "There will be a stronger industry that will ultimately survive," he says. "It will be more profitable and it will be run more efficiently."
The aluminum industry needs to be restructured at all levels, says Van Leeuwen at CS First Boston. "Financial returns for most concerns haven't been adequate to support rational new investment in the industry." He says that while it is apparent that aluminum will play an important role in a growing global economy, "producers must do more than initiate cost-reduction initiatives and must find ways to create value for their basic metal."
Still, buyers are concerned because the aluminum industry traditionally is a lot less forthcoming with marketing details than producers of other industrial commodities.
Pricing issues aren't resolved
Lloyd O'Carroll, chief economist and equity research analyst with Scott & Stringfellow in Richmond, Va., doesn't think buyers will be hurt by the mergers because there will be less cyclicality in pricing and better planning for supply needs. "With two giants in the industry, two types of decisions will be affected," he says. "Production decisions on shutting down capacity and restarting capacity are going to be done in a more disciplined fashion. That means that commodity prices will not fall to as low a level at the bottom of the cycle." The second type of decision that will change is capital budgeting. "Capacity will be added on a more rational, less emotional basis," O'Carroll says. "Commodity prices will act 'better,' and there will be less volatility and a more profitable industry on a longer-term basis."
Another benefit of these giant consolidations, note the analysts, is that some physical business may be taken away from London Metal Exchange (LME) warehouses, which could speed delivery of ingot to processors and fabricators and, ultimately, to end users. Some analysts suggest that a realigned supply base could reduce hedging activity by buyers; if that occurs, there ultimately would be a major impact on the market influence of LME prices, which change daily.
"Part of the long-term strategy of both Alcoa and APA is to move toward a strategic partnership model by increasing the number of bigger customers," suggests Lazarovici. "Under these long-term contracts, more and more business would get priced away from the LME." That will boost interest in the spot market for ingot, he contends, "because a large number of buyers will want to access market prices."
The Alcoa-Reynolds merger will place roughly 24% of Western World primary aluminum capacity in the new entity's hands, while APA will hold around 18%. Reynolds has an annual rated capacity of 1.118 million tonnes with 47,000 tonnes temporarily idled. Alcoa has 3.1 million tonnes in worldwide primary aluminum capacity with 450,000 tonnes of primary capacity idled since 1994.
And that excess capacity brings analyst Morrison at Prudential Securities to think that prices won't erupt quickly. "Years have gone by since the Memorandum of Understanding that reduced global smelting to eliminate huge ingot stockpiles was signed and broadly observed," says Morrison. "Yet the benefits of production cuts that were initiated still seem elusive today." He explains that only a handful of companies intentionally are operating smelters at less than full capacity. "Although producers may keep the capacity off-line until inventories drop and prices firm, the idle smelters create an overhang of potential supply that should limit any price recovery," he says.
Also, there are planned capacity expansions of existing smelters and the additions of some new greenfield projects should add about 1.5%-2% to Western World capacity in 1999 and 2.5% in 2000, Morrison points out. Significant brownfield expansions have been planned for the Dubai Jebal Ali, Australia Tomago, Brazil Puerto Madryn, U.K. Lynemouth, and the U.S. Hawesville and Goldendale smelters. Two greenfield smelter projects are under construction--Alcan's 375,000-tonne-per-year smelter in Quebec, which could be completed in the third quarter of 2000 and should reach full production in mid-2001, and Billiton's 245,000-tonne-per-year greenfield smelter in Mozambique that should be completed in the first half of 2001.
Analyst John Mothersole at Standard & Poor's DRI believes that "aluminum ingot's price may spike upward for a time because of the consolidations, but in actuality will be unaltered appreciably by these recent events." He suggests that "the large producers may be reshuffling management, but they haven't yet made the hard decisions on reducing production." He says that "unless smelter output is reduced worldwide, ingot prices will record only small increases through 2001."
So far, large customer organizations have commented little on the merger and buyout activity. In the past, though, buyers in the automotive industry, especially, have been vocal about the need for less volatility in light metal pricing, improved quality of delivered products, and stricter adherence to just-in-time delivery programs.
And the senior buyer at a metalworking company in St. Louis suggested that "since primary aluminum is a global commodity, a concentration of producers may shift some pricing power to them and away from the LME, and allow stability in mill products on the open market."
It was a lack of pricing stability, for example, which last year caused General Motors to sign a multibillion-dollar, 10-year agreement to source aluminum at predictable prices from Alcan and to develop new automotive-grade products along with the Canadian company. That's because GM had found it difficult to tie car prices to fluctuating costs for the raw material.
Transportation expands
The largest concentration of domestic mill shipments of aluminum is in transportation, containers, packaging, and building and construction. Combined, these three markets account for almost two-thirds of demand. Next come exports and then a grouping of markets that includes appliances and other consumer durables, electrical products, machinery and equipment, and miscellaneous consumer and commercial products.
Nearly 30% of all aluminum mill products are used in parts for transportation products, from cars and trucks to truck trailer and railroad cars; from jetliners to small-engine forklift trucks. That equals about 4.8 billion lb. For example, "The build rates for truck trailers and recreational vehicles have continued at near record levels," says Joseph M. Byers, VP/sales at aluminum extrusion giant Easco Corp. "Based on customer feedback, there are many indications of continuing strength in orders for the balance of the year."
With the slowdown in aerospace production, the aluminum industry has been making a major marketing effort in automotive, touting their metal as a steel substitute. But it hasn't been easy for aluminum marketers, who have continued to run afoul of strict purchasing guidelines from Detroit, especially those relating to material cost, handling, parts-forming, and reparability. And, reiterating past comments that material cost is a huge issue, the automotive industry purchasing source says: "Cost still is the biggest problem; in sheet alone, the premium for aluminum over steel today would be as high as $1,500 per car if it were used throughout the body."
Still, North American automakers are using up to 12 lb more in light-metal parts on average in year-2000-model vehicles. This 4% gain in the use of castings, stampings, extrusions, and forgings will mean an additional 200 million lb of aluminum being used annually by automotive. That will bring total aluminum content in year-2000 vehicles to 4 billion lb, and it will raise the average aluminum content for North American motor vehicles to 260 lb. That's about 8% of the average passenger vehicle's curb weight of 2,100 lb.
Just this summer, the Aluminum Association's Automobile and Light Truck Group joined the U.S. Automotive Materials Partnership (USAMP), a research consortium of the U.S. Council for Automotive Research (USCAR). This initiative, called the "Auto Aluminum Alliance," will work to improve the efficiency of aluminum use in future DaimlerChrysler, Ford, and GM cars and light trucks to help reduce the weight of the typical mid-size family sedan by 40%. The idea is "for the aluminum industry to work more collaboratively with the auto industry to help them meet future materials and customer needs," notes Rick Milner, president of Alcoa's Automotive Group.
According to Richard B. Evans, president of Alcan Aluminum in Cleveland and chairman of the Aluminum Association, "There is a revolution going on in automotive design, but it's happening under the paint with the numerous parts found in cars and light trucks. Auto industry sources say iron is the principal victim of aluminum's continuing advance, although steel is losing some parts applications as well."
Aluminum gains in new vehicles
The 2000 model run in North America will feature a number of unusual new applications for the light metal, including stamped front fenders on Ford Motor's new Lincoln LS sport sedans; stamped liftgates in the rear of most of the redesigned standard-size sport utility vehicles (SUVs) from General Motors, including the Chevrolet Suburban, Tahoe, and GMC Yukon and extruded engine cradles in GM's new Impala and redesigned Monte Carlo sedan.
The Lincoln LS also will feature sheet aluminum hoods and deck lids plus two undercarriage (structural) cross members per car made as aluminum castings. GM's redesigned SUVs also will make use of extrusion-intensive radiator enclosures using aluminum, along with aluminum exterior trim, including roof-rack components.
There are some other significant new aluminum applications in the 2000 models. These include these cast cylinder block, head, bedplate, oil pan and camshaft cover in the all-new 2.2-liter four-cylinder L850 engines for the Lincoln LS and GM's new Saturn midsize L-Series cars; cast aluminum-heads and oilpans for the V-8 engines in GM's new SUVs; and cast aluminum blocks and heads for the U.S.-built engines being made by Toyota Motor for some Toyota and GM small cars and the new Triton V-8 engines for Ford's new Excursion SUVs.
Other new uses for aluminum are the fabricated sheet metal hoods and the extruded front and rear bumper beams on all of GM's redesigned DeVille, LeSabre, and Bonneville models; various parts for the automatic transmissions, suspension systems, and driveline of the Lincoln LS line; the roof racks on Nissan Motor's new U.S.-built Xterra SUVs; and the radiators of Dodge and Plymouth Neons, Honda multiactivity vehicles, and Toyota standard-size Tundra pickup trucks. Also, DaimlerChrysler is expanding production of its 4.7-liter aluminum-head V-8s for trucks for use in more Dodge SUVs and Jeep vehicles.
Among the alliance's various projects, work has begun on standardizing the evaluation of aluminum sheet properties and performance, the identification of potential uses for tailor-welded blanks, and the identification of cost-reduction opportunities for parts fabricated from aluminum sheet.
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
Now Playing:
