Aluminum is a tale of two markets this year: While global purchasing is on pace to increase by 10%, North American aluminum demand is contracting 6%.

And, while analysts such as Scott Burns at Morningstar in Chicago insist that global aluminum consumption will continue to grow during the next several years, other analysts agree with John Mothersole at Global Insight in Washington that "North American end-use markets seem lackluster."

Aluminum remains poorly supported by the U.S. economy. That's why there's a lot of the light metal available to buyers in the U.S. and Canada. They aren't very active this summer because the regional slippage in car and light truck assembly, new-housing construction and consumer spending on durable goods is reducing demand for aluminum-bearing commercial, construction and consumer products.

A mill sales source says building and construction demand is "very depressed" and purchases by service centers and independent fabricators "are coming in fits and spurts, but not steady enough to build any confidence." Delivery leadtimes have slipped under five weeks for most mill products, according to buyers' reports to Purchasingdata.com, when strong-demand leadtimes would be closer to eight weeks.

"With heavy truck assembly volumes being off, we have seen a major reduced impact on our aluminum-buying needs," says James Buddelmeyer, vice president of procurement at General Fasteners in Livonia, Mich. And, the analysts at Harbor Intelligence of Laredo, Texas, suggest that aluminum demand will continue to be affected adversely by "spillover effects from the cooling housing market in coming months in reduced durable goods production and furniture and home furnishing retail sales."

Available data from the Aluminum Association shows that new orders for aluminum mill products have fallen by 12% while producer deliveries have dropped by 5.5% and service center shipments have fallen by 5%. "U.S. and Canadian aluminum orders and shipments are falling in line with the slowing overall economy," says analyst Lloyd O'Carroll at Davenport Equity Research in Richmond, Va. And no immediate pickup is indicated by a recent Purchasing survey of buyers, where the aluminum monthly buying index through August is averaging 8% lower than for the first eight months of 2006.

Ray Turek, the purchasing manager at the Kawasaki Motors plant in Lincoln, Neb., that makes all-terrain vehicles, motorcycle, watercraft and utility vehicles, is one of the very few buyers having trouble this summer with on-time deliveries of aluminum sheet. But that may because he is one of the very few aluminum buyers polled this summer who is planning to expand purchases.

The one outstanding aluminum market niche is in aerospace, says Mothersole, where higher production rates and large order backlogs mean extremely good market conditions will prevail for a while. "The caveat here, however, is that the next generation of civilian and military aircraft look to be light in aluminum," he says. Boeing's new 787, for instance, uses much less aluminum by weight (20%) compared with other recent aircraft, like the 777 (50% aluminum). "This is also the case with new military platforms, like the F-22 and the joint strike fighter," says Mothersole.

Most market analyses suggest higher energy prices should increase aluminum demand in the transportation equipment market as makers work to meet more stringent mileage standards amid heightened concerns about greenhouse gas emissions. "But in North America, this shift in market preferences is a mixed bag," notes Mothersole, "because it comes at the cost of light truck and sport-utility vehicle production, which are heavier users of aluminum on a per-unit basis."

Extruded aluminum shapes are designed, engineered and manufactured to meet specific end-user requirements.

More aluminum is being used this year than in past years; but, like any commodity, the light metal remains a cyclical market. Delivery times for aluminum sheet continue to be erratic as buyers and sellers alike can’t get a handle on purchasing trends.

Meanwhile, nonresidential construction is the more important building market for aluminum products, says Mothersole, who forecasts that "overall shipments to the construction industry will rise very modestly in 2007." That's why non-can sheet and plate shipments by North American mills are 15% lower at midyear and extruded shape shipments have collapsed by 22%.

Packaging is a mature market sector with virtually no new aluminum products, which now is battling inroads from competing plastic bottles and jars. Annualized midyear demand is off 7% for aluminum foils and cans. The International Bottled Water Association, in conjunction with the Beverage Marketing Corp., reports that sales of bottled water in plastic containers in the U.S. were almost 8.3 billion gallons last year, second only to carbonated soft drinks in popularity. The recent report also concludes that sales of bottled water and soft drinks in plastics continue to rise at the expense of other beverages—sodas and beers—in aluminum cans.

Six-month world production of aluminum, meanwhile, has increased by 3% (at 12,146,000 metric tons) from the first half of 2006, according to data from the International Aluminum Institute, while unsold inventories have decreased by 51% to 1,467,000 metric tons. Natixis Commodity Markets projects a relatively balanced market this year with a surplus of 50,000 metric tons. On the other hand, Montreal-based producer Alcan reckons there will be a surplus of 200,000 metric tons this year. (By comparison, there were more than 800,000 metric tons stockpiled in mid-August.)

Dick Evans, CEO of Alcan, forecasts a 10% increase in world primary aluminum consumption this year, vs. 7% growth in 2006, driven by exceptionally high demand in China. "Extremely strong Chinese demand growth should underpin ongoing favorable world market conditions," says Evans in a company statement. Later this autumn, Alcan is merging with Rio Tinto of London to become the world's largest aluminum producer.

Meanwhile, analysts at BNY Jaywalk in New York also expect global consumption of aluminum to increase by 10% this year—while supply grows by more than 11%, "which will exert downward pressure on prices." The latest Jaywalk report says that "although we expect aluminum prices to remain firm throughout 2007, we remain concerned about overcapacity building up in the industry. Therefore, we expect a moderation in the aluminum prices in the medium-to-long term."

Actually, world primary aluminum prices "have been remarkably stable in recent months," says a new report by Natixis Commodity Markets in London, noting that world price for primary ingot has traded between $1.18 and $1.32 for almost a year. Aluminum prices on the London Metal Exchange (LME) averaged $1.27/lb in the first half of the year, compared with a 2006 average price of $1.16.

"There is nothing in the current fundamentals to suggest that prices should move drastically away from their current range (either to the upside or the downside) in the summer months," says the Natixis analysis. "More likely in our view is for prices to drift lower due to seasonal factors."

Another market report by Man Financial of New York says the analysts "are rather surprised that aluminum hasn't responded better to the flurry of acquisition news—both real and rumored—going on around it." And a Standard & Poor's Ratings Services report by credit analysts Thomas Watters and Marie Shmaruk suggests that the price of aluminum ingot "will gradually begin to decline" in coming months due to increased production ahead.

"The primary reason we see gradually declining prices is the 60% increase in Chinese alumina capacity to about 22% of available world alumina supply," they wrote. "By current estimates, that will nearly double to 28 million metric tons/year by the end of 2008 from 15 million metric tons/year currently." Alumina, which is processed from bauxite ore, is smelted to become primary-grade aluminum.

Bank and most brokerage-based analysts generally agree that primary aluminum ingot will average $1.23/lb in world markets this year. That compares with $1.16 in 2006. Natixis now is projecting the LME cash price will be a slightly stronger $1.25/lb in 2007 while the new outlook from Goldman Sachs in New York boosts its aluminum forecast to $1.36 by the end of next year. The brokerage increased its demand-growth assumption for aluminum in 2008 to 2.5% and sees prices escalating because analysts there still believes aluminum supply growth will be unlikely to surge to meet any sales expansion.