Another year of tight supply

Both demand and prices for aluminum are up sharply and expect to hold the gains made in 2004. The reason: Inroads into nontraditional markets.

By Tom Stundza -- Purchasing, 2/3/2005

Demand was so strong in 2004 for aluminum sheet and foil products that supply tightened and leadtimes increased by as much as 75% over 2003. In fact, with shipments through distributors up by as much as 20%, sheet deliveries were averaging 7.5 weeks at the end of last year—the longest wait reported by buyers since PURCHASING's survey was revised a decade ago. And, with a supply shortfall expected again this year, expect prices to continue to rise, but at a much lower level than in 2004.

"Worldwide, economic growth is slowing and demand growth is slowing, but supply growth also is slowing," says analyst Adam Rowley at Macquarie Bank's London office. "Stocks are getting reasonably tight—and will stay that way in 2005." And that's why he thinks aluminum prices will rise by just 2.5% this year, after climbing 20% in 2004.

Market experts point out that the almost nine billion lb of shipments of flat-rolled product was equal to 49% of all fabricated aluminum shipped by domestic mills. But whether that percentage will grow is uncertain because can sheet has become a zero-growth market. Despite the all-out marketing efforts of producers over the past decade touting their product as the next-generation automotive body sheet, automakers have added only 80 lb per car in that timeframe.

What's fueling demand is that many other end-use aluminum products are moving into markets that don't fit aluminum's traditional and well-known markets such as airplane and automotive exteriors, residential windows and doors, appliances and other consumer durables, electrical goods, and beverage cans and food storage wrap.

According to buyers who are readers of PURCHASING magazine, here are some of the growing nontraditional uses for flat-rolled aluminum goods:

• A thin ribbon of aluminum foil is critical to the manufacture of lightweight, flexible, and low-cost solar cells at technology startup Nanosolar in Palo Alto, Calif.
• A number of 28-ft, aluminum-hulled catamarans have been specially built to withstand the winter waves of Puget Sound so commuters can get between the islands of Elliott Bay and their businesses on the Washington state mainland.
• In Nebraska, new, flat, lighter-weight license plates are made of thin, hardened aluminum sheet that accommodates digital-printing technology.
• High-quality valve covers for premium-priced motor sports vehicles are now designed to be made from aluminum sheet.

And don't be misled by the November-December drop in new flat-rolled products bookings for aluminum mill goods in the U.S. and Canada. It was only an inventory-adjusting blip based on the slow-down effect from holiday season manufacturing cutbacks in North America. Domestic shipments of sheet, foil, plate and can stock rose briskly throughout 2004—by an estimated 10%—and the monthly new-orders average was around 11% higher than in 2003.

"The sluggish seasonal demand from certain key end markets like automotive and building materials and for can sheet will end as quickly as it began," insists analyst Michael Gambardella at J.P. Morgan Securities in New York. Analyst Victor Lazarovici at BMO Nesbitt Burns' New York office agrees: "Given normal seasonal patterns, a strong rebound is expected early this year"—especially in key end markets such as aerospace and consumer and commercial products.

A precursor that purchasing of aluminum in the U.S. will recover and remain solid is seen in the Midwest delivered-price premium over commodity exchange values for cathode. Normalized Midwest price premiums typically hover between 3.5¢ and 4¢/lb. The premium actually has been quite high—jumping from an average 3.5¢/lb in 2003 to almost 5.75¢ in 2004 and that has supported the 42% rise in market prices for common-alloy sheet and foil prices, as tracked by Purchasingdata.com between January 2003 and December 2004.

What's more, with Chinese demand sizzling and forecasts of a deficit widespread, world consumers last year used up much of the primary ingot inventory. Global purchasing was close to 30 million metric tons with new-metal supply closer to 29 million. As a result, stockpiles monitored by the London Metal Exchange dropped 51% to 694,750 metric tons at the end of December. After rising close to 9.5% last year, global demand for aluminum metal will rise 5.3% to 31.2 million metric tons in 2005 (from 8.1% growth last year), forecast the Barclays Capital analysts in London, which would generate a global aluminum supply deficit of nearly 500,000 metric tons.

At some point this year, supplies are likely to increase. But with inventories for the metal running at low levels, it will take some time for stocks to be replenished. That means the market will remain volatile and prone to price spikes, suggests Nick Moore, global commodities analyst at ABN Amro in London.

However, while aluminum supplies have been generally tight—and premiums to obtain materials high, market analysts expect some easing of North American supply pressures. Why? Expected capacity additions. Specifically, they point to the expected April restart of the ABI (Aluminerie de Bécancour Inc.) smelter in Quebec, which is 75% owned by Alcoa of Pittsburgh and 25% by Alcan of Montreal. Alcoa operates the 403,000 metric ton/year facility with three potlines, which has been operating at one-third its capacity since early July when a labor dispute first began. Also, Alcoa has also announced plans to restart idled capacity at Wenatchee, Wash., (182,000 metric tons/year) and Massena, N.Y. (50,000 metric tons/year).

Alcan executives in Montreal spent the recent yuletide holidays clearing checkpoints at various securities regulators and stock ex-changes in the U.S. and Canada to complete the spin-off of its Novelis unit. That makes Novelis the world's largest aluminum-rolled products company, the biggest aluminum beverage-can sheet producer in the world and a key supplier of automotive and industrial sheet and foil.

Novelis has begun trading on the Toronto and New York Stock exchanges as a firm that had annual revenues of $6.2 billion in 2003 and 13,500 employees in 12 countries—but also $2.9 billion in operating debt. The new company is legally domiciled in Toronto, but its executive offices are in Atlanta, Ga., close to the headquarters of its biggest customer, beverage maker Coca-Cola Co. Brian Sturgell, previously an executive vice-president at Alcan, is the president and CEO of Novelis.

Meanwhile, the Novelis' former parent—now a mining and smelting giant—has remained busy. Alcan's Arvida Research and Development Centre in Jonquière, Québec, has joined automaker General Motors of Canada and Canada's National Research Council's Aluminum Technology Centre (NRC-ATC) to develop new automotive aluminum applications for chassis support structures. Headquartered in Oshawa, Ontario, GM of Canada manufactures a variety of vehicles, engines, transmissions and other components for Chevrolet, Oldsmobile, Pontiac, Buick, GMC, Cadillac, Hummer, Saturn and Saab models.

With the U.S. and Canadian economies projected to grow at a slightly slower pace in 2005 than in 2004, North American aluminum shipments are expected to rise by about 5%. Lowered light-vehicle assembly levels and a suddenly uncertain level of jetliner production this year will depress flat-rolled aluminum shipments into transportation—despite strong demand from makers of trucks, truck trailers, marine equipment (including barges) and specialty vehicles (from golf carts to landscaping vehicles).

An analysis by BB&T Capital Markets in Richmond, Va., suggests overall aluminum demand to transportation-related users will slide from 9.5% growth in 2004 to 7.5% growth in 2005—which still would be a robust 8.6 billion lb. Some buying sectors, such as heavy truck assembly, are poised to raise purchasing briskly. But, demand from the recreational vehicle industry, for example, is uncertain because of rising interest rates, higher gasoline prices and lower consumer confidence.

In a nutshell, healthy market fundamentals will keep supply/demand in deficit. The BB&T forecast sees healthy 4.5% growth for shipments—equal to 3.6 billion lb—into the U.S. construction market this year, due to a renewed belief in expanded remodeling within the housing sector. This should offset any slippage in new-housing starts. "Also, nonresidential construction, which has been one of the weakest parts of the economy, is poised for recovery," suggests senior metals economist Lloyd O'Carroll. And he suggests 5% growth into the machinery sector for a total of 1.5 billion lb. But, he also sees shipments to the packaging market flat at 4.95 billion lb.

By contrast, after three years of declines, sheet-can stock shipments are projected to be flat at 4.6 billion lb this year, O'Carroll says. That's because one of the largest domestic flat-rolled end-use markets is losing sales to glass and plastics (for plain and flavored water and soft drink containers), lightweight aluminum cans for beer and beverages, and because of the slow-growth sales nature of the beer and soft drink arena.

Demand for aluminum sheet and foil into transportation markets is also dropping because of a slowdown in sales of cars, light trucks and sports utility vehicles, which is offsetting a 4% increase in aluminum pounds per vehicle. (Also, not all of the light vehicle aluminum is sheet-based since extrusions, forgings and castings have been gaining in use.)

However, sheet demand has been bolstered by sales of new trucks—especially large Class 8 vehicles—which had a phenomenal double-digit growth rate (47%) last year. This year that rate of growth is expected to slow to 20% but that still will be healthy since trucking firms are expanding fleets and buying in preparation for new regulatory changes for 2007. Demand for light metal from makers of smaller Class 5-7 trucks also is expected to show solid growth (12%) this year.

But there is, however, one major area of uncertainty for sheet marketers in that market that can play havoc with planning, says O'Carroll. He says, "the amount of aluminum varies greatly, not just between the classes, but within each class as well. Moreover, the implied pounds per truck can change greatly from year to year. Such volatility creates great uncertainty about forecasts of end-use demand."

The truck-trailer market, which has been a strong buyer of sheet for some months now, offers more certainty. With 2005 replacement demand projected to be high again, the build rate is being forecast at 25%—which will create a large market for sheet since aluminum per trailer averages 3,000 lb apiece.

The aircraft manufacturing industry will also boost aluminum sheet and foil demand by an average 11%/year. If this trend holds true into the near future, purchasing of aluminum sheet and foil will reach the last cyclical peak (600 million lb in 1998) by 2006. "Aluminum shipments normally increase ahead of actual aircraft production," O'Carroll says, "given the long leadtimes between material acquisition and airplane assembly, and the restocking of depleted inventory levels up the supply chain."