November/December 1988
In spite of the recent effects of price volatility and competition from other materials, speakers at ISRI’s Aluminum Roundtable shared optimistic views about upcoming aluminum demand.
By Si Wakesberg
Si Wakesberg is a New York City-based consultant to the Institute of Scrap Recycling Industries, Washington, D.C.
More than 400 aluminum industry members listened to mostly optimistic near-term trends for aluminum at the September Aluminum Roundtable sponsored by the Institute of Scrap Recycling Industries in Chicago. The insistent world demand, the record operating rate, the London Metal Exchange backwardation, the consistently high prices--all made this year's market a memorable one. Though clouds loomed behind the glittering facade as speaker after speaker cautioned about a reversal in the market trend and some warned that the industry must beat off the attack from substitute materials, the general mood was still upbeat.
Some scrap executives thought the scrap aluminum market this year trailed the primary market and, as one official put it, "lost some of its steam." But most scrapmen appeared to be satisfied with demand and price levels in 1988. Many agreed that aluminum prices for the rest of the year would be held at or near current levels, and some expected continued good demand into the first quarter of 1989.
Secondary Aluminum Growth
Charting the tremendous rise in secondary aluminum recovery since 1960--from 329,000 tons to 1.9 million tons--Gordon Barnett, manager of recycling and castings operations for Commonwealth Aluminum, Lewisport, Kentucky, noted that in the past eight years alone there has been an increase in production of 38 percent. Barnett asked a pertinent question: "Over this period, did we consume more secondary metal than we produced or was secondary production responsible for the inventory buildup of total aluminum inventories and consequently the cause of smelter closures in 1986?" Barnett said that the problem was that, while there is apparently good information for primary consumption and production, there is no consumption information available for secondary production.
Discussing the recycling of aluminum used beverage cans (UBCs), Barnett indicated that in 1987, 74.0 billion cans were produced, totaling 2.7 billion pounds of aluminum. Of these, 36.7 billion cans were recycled, or 1.3 billion pounds. "In 1988, I estimate production of 81 billion cans, or 2.95 billion pounds. ... I expect the recycling rate to increase [from 50.5 percent] to 56 percent, which means that 45.3 billion cans, or 1.65 billion pounds of aluminum, will be recycled." Barnett warned of "a significant reentry by steel to the can market, which could be more dramatic and damaging to the aluminum industry than we could imagine." He cautioned that "we must all strive to keep our operating cost to the lowest possible dollar."
Use More Extrusions
Urging increased usage of aluminum extrusions and declaring that the high price of aluminum is "frustrating" the extruding industry, George Levy, senior vice president, National Aluminum Corporation, Pittsburgh, Pennsylvania, and chairman of the Aluminum Extruders Council (AEC), said he hopes raw material costs will stabilize. "It's difficult to stay competitive in the midst of highly unstable aluminum prices," he said, calling this "the number one. roadblock to the perception of our products' value in the marketplace." He emphasized that it was "price volatility, rather than high prices, that presents the greatest threat to our future."
Levy commended the Europeans for achieving a better extrusion performance. "They have learned how to roll thinner foil, reduce wall thickness of extrusions, produce lightweight aluminum-lithium alloys for aircraft, and reduce the gauge of beverage cans," he pointed out.
He foresees an increase in extrusion use in automotive areas, and steady growth in aircraft and aerospace markets. Levy discussed the AEC "Shapemakers" program to spur aluminum extrusion use. He said the industry must continue to seek new applications and new markets to replace those lost to wood, vinyl, PVC, molded plastic, fiberglass, and composite materials. He urged redoubled effort throughout the industry to meet customer needs.
Forecasting a Volatile Market
Veteran metals executive Richard Willstatter, senior vice president, Gerald Metals, Inc., Stamford, Connecticut, pointed to the remarkable rise in aluminum prices, as well as other metals prices, after what he called the stock market "meltdown" of October 19, 1987. Two weeks after the so-called meltdown, aluminum was 84 cents a pound, lead was 27 cents a pound, and zinc was 35 cents a pound. Instead of declining as was expected, prices today "are all substantially higher," he said. What happened? he asked, indicating that the Metals Week transaction prices for the first six months of 1988 were, for aluminum, $1.11 per pound; for copper, $1.105 per pound; for nickel, $6.15 per pound; and for cadmium, $7.73 per pound. "Predictable?" asked Willstatter. "Forget it!"
One reason, he noted, was that "industrial consumption around the world has been fantastic. ... Even the poor old steel business has been strong. The U.K.'s steel figures show the first seven months of 1988 up 11. 9 percent. ... Japan's domestic aluminum demand has grown far faster than expected. … "
Willistatter also reported that U.S. primary aluminum output in the first seven months of 1988 was 2.3 million metric tons (mmt), 22.3 percent higher than in the same period a year before. Everyone is trying to get into the aluminum act, he said, then asked, "Will world consumption a dozen years from today be able and willing to absorb two to three million metric tons of aluminum?"
Aluminum Facing Intense Competition
Aluminum is facing intense pressure by competing materials, warned Dean L. Faulkner, commercial manager, nonferrous metals, General Motors, Detroit, who bluntly declared that "aluminum body sheet products have been outperformed by other materials." He said that "in some cases the performance-driver has been cost-related to either the material itself or the payback of the [retooling]." He noted that future aluminum sheet use for hoods, deck lids, and roofs by GM "will be limited to such optimum applications as in the Cadillac Allante and for decorative, bright trim."
Discussing actual use of aluminum by GM in North America, Faulkner reported that "our total aluminum consumption represents over 660 million pounds per year, or about 140 pounds per passenger car and 75 pounds per truck." He said that 120 million pounds of sheet products are consumed annually, including ingot tolled into fabricators. The largest application, he pointed out, is in the area of radiators, condensers, and compressors.
Secondary aluminum and scrap, Faulkner said, "represent the lion’s share of total aluminum consumed, encompassing more than 170 million pounds of scrap and 67 million pounds of secondary consumed directly by divisions of GM, and more than 340 million pounds delivered to GM in the form of castings from various value-added suppliers." While currently one-third of all GM engines have aluminum heads, Faulkner stated, GM foresees a penetration to between 45 percent and 65 percent by 1992. As for radiators, "we are currently at about a 50/50 split, but with the costs of aluminum remaining so volatile, any move toward increasing the ratio in the near term is unlikely."
Prime and Secondary Spread
While secondary aluminum prices rose in the past year, the differential between them and primary aluminum prices widened considerably, according to Edward G. Cowan, vice president for aluminum and zinc operations, Roth Bros. Smelting Corp., East Syracuse, New. York. He gave this example: "In September 1987, the American Metal Market price for 380-3 percent die-casting alloy stood at about 80 cents per pound. At that time, the Midwest U.S. primary transaction price for 99.7 stood at approximately 81 cents per pound. It's amazing how similar those prices were at that time! On September 1, 1988, the American Metal Market price for 380-3 percent die-casting alloy was $1.01 per pound; the Midwest prime transaction price for 99.7 was $1.30 per pound. During that same time frame, standard die-cast 380 increased about 25 percent, while primary increased about 55 percent."
This, Cowan said, underscores the fact that "secondary ingot is undervalued in comparison to historical differentials to primary--remembering that primary aluminum still accounts for the large majority of total aluminum produced."
In determining a price, secondaries have less control over the selling price of the product than do primaries, Cowan pointed out. "The selling price of our product is determined by the available molten price of scrap--none of us have very much captive scrap available, so it's what we can buy on the outside--plus our overheads to equal our break-even price."
Cowan indicated that "those casters that produce a casting for their own consumption have been unable to pass through their increased costs, and as a result, their manufacturing margins have been wiped out." He reported that die-casting shipments for the second quarter hit a record high of 90.5 million pounds per month and added, "Several factors have pushed secondary aluminum usage during the year. Obviously, U.S. automakers have enjoyed a good volume year. We also have seen some castings that were being made offshore return to the U.S. due to the weaker dollar. ... All of these factors bode well for the forecasts of increased usage into 1990 and beyond."
Short-Term and Long-Term Trends
"Over the next couple of quarters, aluminum prices will remain firm--probably testing $2,800 a [metric] ton and as high as $3,200 a [metric] ton--but in the longer term, we look for prices to weaken back to $1,500 to $1,600 a [metric] ton by 1990," said prominent analyst Frederick R. Demler, vice president, commodities, Drexel Burnham Lambert Inc., New York City. His forecast was based on a moderate growth in consumption, little idle capacity, and a low inventory level that probably will rise.
Demler noted that aluminum consumption, growth, and deliveries have been on a rising trend since 1983. Aluminum growth has averaged close to 3 percent a year. "Last year," he said, "consumption was up over 5 percent; this year it will be up about 2 percent." According to Demler, the industry is currently operating at 97 percent of capacity and the U.S. is operating in excess of 100 percent nameplate capacity. "There is little idle capacity to be reactivated," he pointed out. He indicated that some strong-currency countries plan cutbacks, and said that the high rates of utilization are creating maintenance problems. Inventories are forecast to increase, he added, but only modestly.
Examining the economic outlook, which would influence trends in aluminum and other metals, Demler said that "we look for continued positive but slowing growth over the next year: 3.3 percent to 2.4 percent." He said that the economy may slip recessively by 1990 and added that there is anticipation that inflation will accelerate to 8 percent by the end of 1989. This, he noted, could cause a negative impact on housing and autos.