Aluminum Recovery Requires Production Cuts

Si Wakesberg is New York bureau chief for Scrap Processing and Recycling.


Without drastic cutbacks in aluminum production, market recovery will be stalled. Whether they said it outright or simply implied it, nearly every speaker at Scrap Processing and Recycling's Aluminum Roundtable, held in late September in Chicago, offered that simple forecast. Most also predicted that necessary cutbacks would eventually be made, allowing a market turnaround, but, they pointed out, a variety of discouraging factors must be dealt with in the meantime. For example, an extruder called 1991 the worst year for extruded aluminum shape shipments in eight years, a prime producer asserted that all domestic markets, except packaging, are expected to decline in 199 1, " and a merchant noted that the United States has lost its reservoir of major aluminum consumers such as the electronics and automotive industries.

Nevertheless, there were glints of optimism amid this doleful news (which was compounded by a London Metal Exchange [LME] aluminum cash price on the day of the roundtable of 53 cents per pound): A scrap executive speculated that the aluminum can recycling rate could grow 40 to 50 percent in the next decade, a secondary smelter official forecast a period of growth for aluminum castings, and an international trader noted that "demand for aluminum appears to have been up in the first half of the year."

During the past 12 months, as new capacity has been added, primary aluminum production has risen "substantially"--from an annual worldwide rate of 14.09 million metric tons (mt) in July 1990 to one of 15.04 million mt in June 1991--said E. Jack Gates, general manager of the reduction division of Reynolds Metals Co. (Richmond, Va.), speaking before the more than 400 industry executives at the roundtable.

Production levels should fall, however, during the balance of the year, Gates said, noting that "they will also decline in 1992--at least until additional capacity is started in the second half of the year." Curtailments are already in effect at smelters worldwide, he pointed out, and “shutdowns announced into 1992 total 278,000 mt." That figure, however, does not include the most recent Reynolds cutback, which has brought Reynolds's total production cuts to 12 1,000 mt. There could be additional shutdown announcements "if supply/demand conditions continue to deteriorate," Gates said.

Gates's comments on near-term domestic fundamentals were no more heartening. Industry projections call for 1991 U.S. aluminum shipments to reach 13.6 billion pounds, a 5-percent decline compared with last year. Furthermore, 'he said, with the exception of packaging, all domestic markets for the metal should see a downtrend this year.

It is becoming cost-prohibitive to build new aluminum capacity, with "a normal-sized smelter" today requiring an investment of $1 billion to $1.5 billion, according to Gates. Most new smelters will be either fully or partially government-owned, he said, predicting that we probably will not see any more smelters built in the United States or, possibly, Canada.

"The selling price necessary to justify new expansions is in the 85-to-86-cent-perpound range, so nobody is excited about starting a project, " he contended. In addition, Gates said, there are no new alumina plants coming on-stream. Because approximately 2 pounds of alumina are required to produce 1 pound of aluminum, alumina plants are even more expensive to build and operate, he said.

Through these many down signs, Gates saw some ups when contemplating aluminum's future. "The market for aluminum will continue growing," be declared, pointing to exceptional opportunities for increases in aluminum use by the overseas beverage container industry and the automobile industry. (Studies have forecast the amount of aluminum in the average car may reach 350 pounds or more by 2000, Gates said.)

"There will be a worldwide shortage of both primary and scrap" to meet these growing needs, he declared.

Taking the statistics Gates presented a step further, Fred Lonner, president of Fred Lonner Co. (New York City), said that significant production cutbacks are needed if the aluminum market is to be brought back into balance - So far, however, he said, most of the big aluminum producers seem to be avoiding shutdowns. "With the exception of Reynolds, the aluminum industry leaders are waiting for the smaller, higher-cost producers to cut their production or close down altogether," Lonner explained.

This cutback evasion, he indicated, has cost the producers dearly. "Assuming that by the time prices had dropped to 68 cents per pound--or about $1,500 per mt--everyone recognized that the oversupply would not disappear on its own volition, some major cuts should have been made." Because they weren't, and LME cash prices have since tumbled to $1,168 per mt, producers have lost substantial income, he said. How substantial? According to Lonner's calculations, based on the Aluminum Association's (Washington, D.C.) 1990 total world production estimates of 17.832 million mt and a price drop of $332 per mt, "this is equivalent to an annual income loss to the aluminum producers of about $5.92 billion."

Discussing the large aluminum inventories overhanging the market, Lonner spotlighted the period from 1972 to 1976, when the General Services Administration began to dispose of more than 1.11 million mt of aluminum from the national defense stockpile. As the stockpile inventory fell, he pointed out, the price of aluminum rose from 20.5 cents per pound in 1972 to 43.1 in 1974; it dropped a bit in 1975, but moved back up to 43.1 cents per pound in 1976.

Like Gates, Lonner was upbeat about aluminum's future, noting that Honda is now producing an automobile that uses 1,000 pounds of aluminum per car. Aluminum is "off the lows of the recession," he said, but, again, cautioned that "for a price recovery to occur in the medium term, it appears that major production cuts are absolutely essential

The downtrend in aluminum has hit the extrusion industry hard. In fact, said William J. MacDonald, group vice president and chief operating officer for Indal Ltd. (Weston, Ontario) 1991 will probably turn out to be the worst year for shipments of extruded shapes since 1983."

He pointed out that, compared with figures from the extrusion industry's peak-just four short years ago-1991 shipments are expected to be down some 14 percent. In one of the extruders' biggest markets, building and construction, the drop has been even sharper, at 24 percent, he said.

What has been the cause of this drastic decline? MacDonald, who's also the chairman of the Aluminum Extruders Council (AEC) (Washington, D.C.), acknowledged that the general recession has been a fundamental factor, but declared that the state of the economy is only part of the problem.

The other big influence, he said, has been “competitive materials."

In the past six years, MacDonald pointed out, the industry has lost 4 percent of its market share--particularly in the important window and door applications--to competitive materials. At the same time, wood's share of the market has risen from 38 percent to 49 percent and vinyl's share has grown from less than 3 percent to a remarkable 17 percent, he noted.

Extruders have not sat by idly, MacDonald declared; instead, through the AEC, they are "doing more than ever before to promote the use of aluminum extrusions." One obstacle, he said, is the "volatility" of aluminum prices, specifically mentioning billet prices, which are now at a level two-thirds of their price a year ago. "While volatility may make your day," MacDonald said, "it hurts the user and inhibits aluminum's selection as a material of choice in many markets."

Will next year be any better for prices? Examining rising inventory levels, high capacity operations, large imports from the Soviet Union, the reluctance of producers to cut back output, and a weaker recovery pace, the extrusion executive said that one might readily conclude that 1992 will be another year of soft prices. Nevertheless, with innovation, industry promotion, sound management, and cooperation among suppliers and customers, he hoped, a stronger extrusion industry will emerge.

Secondary aluminum smelters have their problems-this segment of the industry has shrunk from 60 companies east of the Rockies making specification ingot in 1960 to only 20 today--but, said Richard Neufeld, president of U.S. Reduction Co. (Munster, Ind.), "Don't feel too sorry for us." Despite the decline in the number of companies, he explained, capacity is greater today than it has ever been.

Furthermore, and more important, he said, "We are living in a day of growth in the market for aluminum, castings--the market we serve." The domestic automobile industry, for example, will continue to increase its use of aluminum castings in cylinder heads and will probably greatly expand production of aluminum engine blocks, Neufeld predicted.

Will there be enough scrap supplies and sufficient smelter capacity to handle the projected increases in demand? The answer to both parts of the question, he said emphatically, is "Yes." Estimating current U.S. scrap generation at approximately 5.5 billion pounds and projecting this figure could grow to more dm 7.0 billion Pounds by the late 1990s, Neufeld asserted that “we, as smelters, have never run out of scrap in the 42 years I have been in business." As to smelter capacity, he pointed out that "the five largest smelters do 70 percent of the business and that trend will continue."

Looking ahead, Neufeld predicted that "aluminum pricing will move up over the next 12 months, to reach a level close to 70 cents per pound one year from today." He also forecast that world demand for the metal will eventually outstrip supplies.

Marvin Fox, chief executive officer of Markovits & Fox (San Jose, Calif.), believes that, although the U.S. aluminum can recycling rate has already reached more than 63 percent, there is still plenty of room for growth. In fact, he said, some authorities predict a 40-to-50-percent increase in worldwide aluminum can recycling in the next decade.

What could influence such growth? There is potential for recycling expansion through non-beverage aluminum cans, as well as through beverage cans overseas, Fox noted. In addition, he pointed out, as the world's population increases, so does soft drink consumption, thereby offering additional recycling opportunities.

There is at least one negative fundamental impinging on aluminum can recycling, he cautioned, explaining that the "downgauging" or "lightweighting" of the aluminum can has pushed the number of cans per pound from 22 to 28, "and even lighter cans are forthcoming." Nevertheless, if aluminum cans begin to be recovered overseas in the same manner as in the United States, Fox said, the results would be "awesome." •

At the recent Aluminum Roundtable, industry executives predicted that aluminum market fundamentals will improve, but only after producers cut back.