Global demand for aluminum dropped 4% in 2001, the first appreciable world decline since 1993. Market analysts expected that consumption would bounce back rather briskly this year. It hasn't. Purchasing has yet to recover from a demand deterioration that began in the second half of 2000 and continued through 2001.

Travis Engen, chief executive of Montreal-based Alcan Inc., the industry's forecaster, sees 2002 world aluminum supply growing 3.4% and demand rising in tandem at 3.5%. However, supply will continue to exceed demand as much as 450,000 metric tons, in part because China is expected to be a net world exporter of 200,000 tons this year, rather than a net importer (of 120,000 tons in 2001). Also, slow growth in global purchasing of aluminum mill products has kept mid-2002 world inventory at 57 days of supply, the highest level in six years, and driven down the spot price for ingot. The average on the London Metal Exchange (LME) was 66¢/lb in 2001. Through July 2002, it averaged 62¢.

Products outweigh demand

Aluminum is the world's second most used metal (after steel), with 2001 annual production at 32 million metric tons.

The U.S. aluminum industry is the largest in the world with installed smelting capacity of more than 4.2 million metric tons. The industry typically operates at 88% of capacity, generating 3.7 million tons of metal annually. However, the Pacific Northwest power crisis of the past two years has shut 1.5 million tons/year of annual domestic aluminum capacity. Upshot: Annualized U.S. production of 2.6 million metric tons through June 2002 means the industry is operating more efficiently—and that is likely to generate more domestic supply than is needed. Since there also is world oversupply and only moderate demand growth in Asia and Europe, domestic and foreign smelters are providing more than enough ingot worldwide for processing into mill products.

Even the finished-product sector has too much capacity, says analyst Lloyd T. O'Carroll of BB&T Capital Markets in Richmond, Va. In the U.S. alone, the fabricating side of the industry is on course to make more than 15 billion lb/year of mill products. "However, as evidenced by weak six-month pricing of mill products, there is sluggish demand from key aerospace and industrial gas turbine markets," says Salomon Smith Barney analyst Michelle Applebaum in Chicago. "We're seeing a very slow growth aluminum economy." As the rate of demand growth has disappointed market analysts, consensus forecast for the 2002 LME ingot price average has fallen steadily—from 76¢ to 70¢ to 68¢ and, most recently, to 63¢.

Expanded buying awaited

James Southwood, president of Commodity Metals Management Co. in Wexford, Pa., expects the U.S. market to grow about 1.5% percent in 2002. "Most of the growth will occur in the second half," he says. It'll have to play out that way, since first-half demand is up just 0.2%. Domestic demand has been driven mainly by robust automotive and construction activity, but anticipated improvement in the manufacturing economy hasn't yet occurred. Purchasing of extrusions fell 14% in 2001 and even the 1% growth forecast by Southwood for 2002 will be hard to accomplish. Reason: Six-month demand is down 2.5% and third quarter new-order bookings are down from year-ago levels. The flat-rolled market declined 10% in 2001 while analysts had expected a 2% increase in demand.

Economist Christine Chmura at Chmura Economics & Analytics in Richmond, Va., says, "Business investment was the last piece of the U.S. economic puzzle needed to put the recovery on solid ground. However, with unused capacity in nearly every sector from the late-1990s business investment craze, there is little pressure on businesses to place new orders. This weak demand has stifled durable goods orders and caused the pace of the recovery to slow, eroding consumer confidence in conjunction with shaky capital markets." At midyear, aluminum purchasing was flat with the six-month volume of 2001. "Overall aluminum mill product orders through midyear remained weak; in fact, any way you slice the data, there is no indication that the U.S. aluminum-using economy is about to surge," says analyst Tom Van Leeuwen at On The Beach Equity Research in Greenwich, Conn.

High inventory levels, rising production, the possibility of further production restarts, and demand weakness continue to weigh on prices. While the worst of the decline may be over, overall aluminum prices remain 7.5% below year-ago levels, and the U.S. recovery in pricing—due to an incipient recovery in global aluminum demand—won't occur until 2003, suggests Tim O'Neill, chief economist at the Bank of Montreal.