Aluminum’s Prospects and Problems in Europe

Aluminum’s Prospects and Problems in Europe

Worldwide trends affect the European aluminum industry in positive and negative ways. Here’s a summary of what’s been happening in the industry and expected changes.

The greatest source of primary production of aluminum--after the United States and Canada--is Western Europe, where production exceeds 3.9 million tons. Therefore, any changes to Europe's aluminum industry likely will have worldwide impact on industries engaged in the trading, handling, or use of this metal.

Primary Industry Still Going Strong

Is the European primary aluminum industry in the early stages of terminal decline? More than one commentator has suggested this recently, but after examining the situation, it can safely be said that, as in the case of Mark Twain, reports of the industry's demise appear premature.

Primary aluminum consumption in Europe exceeds 4 million tons per year. Meanwhile, although Europe's aluminum production capacity reportedly exceeds 3.9 million tons, actual production figures show it to be 3.6 million tons. Consequently, competition to supply consumers' needs is keen.

What's the outlook for European aluminum production? To answer that question requires an analysis of the advantages the European primary aluminum industry has over its overseas competitors. The European primary aluminum industry enjoys significant vertical integration, with more pricing benefits and product ranges than many of its overseas competitors. In addition, its location and tight geographical configuration allow the European aluminum industry to avoid expensive transportation costs.

Up to now, however, the ultimate protection for the European industry has been the 6-percent import duty, which many countries in Europe, especially France--the major aluminum producer in the region--are fighting to keep. Nevertheless, many believe that this import duty will be reduced or totally withdrawn in the future, since defending the interests of the public in whatever guise appears correct to the general population is as much a part of the objective of the one-market Europe as is protection of the interests of industrial producers.

The Energy Factor

Whether or not the import duties are withdrawn, European aluminum producers fear a threat to the continuing health of their industry: energy costs. The overwhelming majority of primary aluminum producers in other parts of the world have established their facilities and production centers near abundant and cheap energy supplies. For example, the development of Middle Eastern capacity was based on this fundamental. In addition, Canada and northwest regions of the United States enjoy similar justifications.

In Europe, however, inexpensive energy is available in only two countries: Norway, which harnesses hydroelectric power, and Iceland, which has explored geothermal opportunities. Meanwhile, the aluminum industry in West Germany has, up to now, contended with high electricity rates, and France mitigates its electric costs with subsidies.

Japan has proved that a major industrial country can do without its own production facilities if operating costs are too high, and West Germany probably would not hesitate to take similar actions if circumstances necessitated them, even though the country is currently one of Europe's largest producers. Already, projections indicate that West Germany's secondary production will exceed primary production by the end of the century.

Nevertheless, a number of factors may still rescue the European primary industry. Highest on this list is the economic and social growth in Eastern Europe. Although East European production of primary aluminum exceeds the region's consumption, most of that production comes from the Soviet Union and Romania, which appear to be lagging in economic development to other nearby nations. In the more-quickly developing Eastern European countries it appears that there will be long-term potential for Western European producers to supply aluminum for packaging and medium-term potential for supplying the building and construction sector. Not only do the West European producers have the market skills and product range to take advantage of the growing economic development in East Europe, but--especially in the case of West Germany--investment credits in the form of financial support can be made, and is being made, to East Germany and other emerging East European economies. This western support may persuade industries m Eastern Europe to accept products, including aluminum, from the West as compensation for the financial backing.

Is Scrap Aluminum the Answer?

Another threat to West European competitiveness in the primary aluminum sector lies in the Middle Eastern aluminum industry, s continuing movement toward vertical integration. Many companies in those countries are expanding their product range beyond ingot and sow products. Ultimately, however, the survival of Western Europe's industry may rest on increased use of scrap aluminum by tile primary industry--from both industrial and postconsumer sources.

International Primary Aluminum Institute (IPAI) statistics indicate that global primary production derived from scrap was 12 percent in 1984, and 20 percent--or approximately 1.6 million tons--in 1988. Even though the use of scrap material in the primary industry is in its infancy in Europe compared with in the United States, the European primary aluminum industry logically should move in this direction in order to benefit from recycling and its energy-related savings. Companies such as Alcan and Alcoa are heavily encouraging the collection, processing, and reuse of scrap aluminum-particularly packaging scrap.

The success of these plans, however, is somewhat of a chicken-and-egg puzzle: In order to increase scrap use, there must be greater production of aluminum materials in the first place.

Secondaries Contend With More Forces

Some of the same factors that affect Europe's primary aluminum sector affect its secondary smelting industry, but because the secondary industry is more fragmented and versatile than the primaries, there are many more factors that determine its overall health.

Automobile production, for example, is important because it consumes about 50 percent of all secondary aluminum. General engineering demand for scrap aluminum, however, as well as the building and construction sector, also is vital. In addition, compared with the primary industry, the secondary smelting industry is more vulnerable to fluctuations in interest rates and exchange rates. This is because these changes affect not only consumption, but also the quantity of scrap generated-a fundamental part of the aluminum scrap recycling industry.

In the early 1980s, the United States and Canada supplied some 47 percent of scrap imports into the EC; this dropped to as low as 10 percent in the late 1980s, and then recovered by the end of the decade to about 25.5 percent. The overwhelming factors in this variation were currency fluctuations in Europe and competition for scrap aluminum from U.S. and Canadian domestic markets and Japan and other parts of the Pacific Rim.

Europe's secondary aluminum industry also contends with the increasing competition from the primary sector for certain types of scrap, for which the scrap industry traditionally had unequaled demand. The energy savings afforded primaries that employ some scrap in their operations have been so significant that the primary sector has been able to offer higher prices for high-grade and extrusion scrap than have the traditional users. And when it comes to buying scrap, the primary sector is more responsive to a rising market than the secondary sector, giving it greater ability to attract more scrap.

Secondary aluminum smelting is vital to Western Europe: The combined secondary production of West Germany and Italy equals that of Japan or the United States; when the secondary production in France, the Netherlands, and the United Kingdom is added, the total tonnage is more than a million tons greater than in either Japan or the United States. Furthermore, growth in the Italian and West German secondary aluminum industry through the last decade has been quite high.

Eastern Opportunities Abound

It is difficult to gauge how the changes m Eastern Europe will affect the secondary aluminum industry in Western Europe. What is known is that in recent years Eastern Europe has supplied between 6 and 27 percent of Western Europe's annual scrap and remelt ingot needs; although the trend has fluctuated, the figure has remained close to the low end of the range.

No doubt, Western Europe's secondary aluminum industry will benefit from any increased demand from Eastern Europe. In addition, the same grounds that indicate the p sectors in Western Europe will benefit from providing finances to Eastern Europe apply to some extent to the secondary industry's ability to gain market share in this expanding region.

The Western European secondary sector could benefit from development of small, low-capital smelting units in East Europe, much as Japanese secondaries have profited from small secondary centers m other parts of the Pacific Rim region. The availability of local scrap, combined with Western European investment and financial and technical support, could make Eastern European secondary aluminum units commonplace.

Environmental controls in Eastern Europe are, and likely will continue to be, less rigid than the requirements that are increasing day by day m Western Europe and are having an enormous impact on the secondary aluminum industry throughout Western Europe. As the costs of complying with environmental controls increase, a number of financially secure large producers are developing at the expense and demise of smaller secondary units.

Use of aluminum in the secondary industry, particularly in the automobile sector, is likely to rise. While this is encouraging, the European secondary sector continues to feel the threat of eroding profit margins, due to both the competitiveness of scrap sources and the escalating costs of environmental compliance. Therefore, it appears that the secondary aluminum smelters in Europe can look forward to rationalized growth over the next few years, but Europe must respond promptly and effectively to the various opportunities presented it to succeed.

Concerns on the Scrap Side

An overview of the aluminum scrap processing industry in Europe is generally encouraging: Technical improvements and developments have bettered scrap segregation and sorting abilities and increased quality standards. In addition, increased demand is expected from primary and secondary producers.

The success of scrap aluminum as a raw material, however, is threatened by the plethora of complex and often unrealistic legislation being implemented throughout Europe. As in the United States, the very movement of scrap across borders is being threatened by legislation that wrongly embraces recyclables as "waste." The Bureau International de la Recuperation is doing its utmost to convince European and other legislators that the continued viability of the aluminum scrap processing industry--and its primary and secondary consumers--is severely impaired by this waste designation.

The supply of aluminum scrap into Europe primarily depends on currency factors. The unpredictable, enormous swings in values of European currencies in comparison to the U.S. dollar have had more of an effect on movement of scrap into European consumption facilities than have primary prices listed on the London Metal Exchange (LME). This situation, however, could change since there are some discussions of using some type of secondary ingot contracts--which would have a closer relation to secondary aluminum pricing than current indicators--as a hedging vehicle on the LME.

Europe's scrap processing industry also will be affected by the likelihood that increasing aluminum scrap supplies will come from the Third World. And as with other segments of the aluminum industries in Europe, demand developments in Eastern Europe will play a role in the scrap sector, particularly if new secondary ingot production in Eastern Europe becomes reliant on the supply of scrap from overseas.

Putting It In Perspective

Aluminum’s Prospects and Problems in Europe

Worldwide trends affect the European aluminum industry in positive and negative ways. Here’s a summary of what’s been happening in the industry and expected changes.

The greatest source of primary production of aluminum--after the United States and Canada--is Western Europe, where production exceeds 3.9 million tons. Therefore, any changes to Europe's aluminum industry likely will have worldwide impact on industries engaged in the trading, handling, or use of this metal.

Primary Industry Still Going Strong

Is the European primary aluminum industry in the early stages of terminal decline? More than one commentator has suggested this recently, but after examining the situation, it can safely be said that, as in the case of Mark Twain, reports of the industry's demise appear premature.

Primary aluminum consumption in Europe exceeds 4 million tons per year. Meanwhile, although Europe's aluminum production capacity reportedly exceeds 3.9 million tons, actual production figures show it to be 3.6 million tons. Consequently, competition to supply consumers' needs is keen.

What's the outlook for European aluminum production? To answer that question requires an analysis of the advantages the European primary aluminum industry has over its overseas competitors. The European primary aluminum industry enjoys significant vertical integration, with more pricing benefits and product ranges than many of its overseas competitors. In addition, its location and tight geographical configuration allow the European aluminum industry to avoid expensive transportation costs.

Up to now, however, the ultimate protection for the European industry has been the 6-percent import duty, which many countries in Europe, especially France--the major aluminum producer in the region--are fighting to keep. Nevertheless, many believe that this import duty will be reduced or totally withdrawn in the future, since defending the interests of the public in whatever guise appears correct to the general population is as much a part of the objective of the one-market Europe as is protection of the interests of industrial producers.

The Energy Factor

Whether or not the import duties are withdrawn, European aluminum producers fear a threat to the continuing health of their industry: energy costs. The overwhelming majority of primary aluminum producers in other parts of the world have established their facilities and production centers near abundant and cheap energy supplies. For example, the development of Middle Eastern capacity was based on this fundamental. In addition, Canada and northwest regions of the United States enjoy similar justifications.

In Europe, however, inexpensive energy is available in only two countries: Norway, which harnesses hydroelectric power, and Iceland, which has explored geothermal opportunities. Meanwhile, the aluminum industry in West Germany has, up to now, contended with high electricity rates, and France mitigates its electric costs with subsidies.

Japan has proved that a major industrial country can do without its own production facilities if operating costs are too high, and West Germany probably would not hesitate to take similar actions if circumstances necessitated them, even though the country is currently one of Europe's largest producers. Already, projections indicate that West Germany's secondary production will exceed primary production by the end of the century.

Nevertheless, a number of factors may still rescue the European primary industry. Highest on this list is the economic and social growth in Eastern Europe. Although East European production of primary aluminum exceeds the region's consumption, most of that production comes from the Soviet Union and Romania, which appear to be lagging in economic development to other nearby nations. In the more-quickly developing Eastern European countries it appears that there will be long-term potential for Western European producers to supply aluminum for packaging and medium-term potential for supplying the building and construction sector. Not only do the West European producers have the market skills and product range to take advantage of the growing economic development in East Europe, but--especially in the case of West Germany--investment credits in the form of financial support can be made, and is being made, to East Germany and other emerging East European economies. This western support may persuade industries m Eastern Europe to accept products, including aluminum, from the West as compensation for the financial backing.

Is Scrap Aluminum the Answer?

Another threat to West European competitiveness in the primary aluminum sector lies in the Middle Eastern aluminum industry, s continuing movement toward vertical integration. Many companies in those countries are expanding their product range beyond ingot and sow products. Ultimately, however, the survival of Western Europe's industry may rest on increased use of scrap aluminum by tile primary industry--from both industrial and postconsumer sources.

International Primary Aluminum Institute (IPAI) statistics indicate that global primary production derived from scrap was 12 percent in 1984, and 20 percent--or approximately 1.6 million tons--in 1988. Even though the use of scrap material in the primary industry is in its infancy in Europe compared with in the United States, the European primary aluminum industry logically should move in this direction in order to benefit from recycling and its energy-related savings. Companies such as Alcan and Alcoa are heavily encouraging the collection, processing, and reuse of scrap aluminum-particularly packaging scrap.

The success of these plans, however, is somewhat of a chicken-and-egg puzzle: In order to increase scrap use, there must be greater production of aluminum materials in the first place.

Secondaries Contend With More Forces

Some of the same factors that affect Europe's primary aluminum sector affect its secondary smelting industry, but because the secondary industry is more fragmented and versatile than the primaries, there are many more factors that determine its overall health.

Automobile production, for example, is important because it consumes about 50 percent of all secondary aluminum. General engineering demand for scrap aluminum, however, as well as the building and construction sector, also is vital. In addition, compared with the primary industry, the secondary smelting industry is more vulnerable to fluctuations in interest rates and exchange rates. This is because these changes affect not only consumption, but also the quantity of scrap generated-a fundamental part of the aluminum scrap recycling industry.

In the early 1980s, the United States and Canada supplied some 47 percent of scrap imports into the EC; this dropped to as low as 10 percent in the late 1980s, and then recovered by the end of the decade to about 25.5 percent. The overwhelming factors in this variation were currency fluctuations in Europe and competition for scrap aluminum from U.S. and Canadian domestic markets and Japan and other parts of the Pacific Rim.

Europe's secondary aluminum industry also contends with the increasing competition from the primary sector for certain types of scrap, for which the scrap industry traditionally had unequaled demand. The energy savings afforded primaries that employ some scrap in their operations have been so significant that the primary sector has been able to offer higher prices for high-grade and extrusion scrap than have the traditional users. And when it comes to buying scrap, the primary sector is more responsive to a rising market than the secondary sector, giving it greater ability to attract more scrap.

Secondary aluminum smelting is vital to Western Europe: The combined secondary production of West Germany and Italy equals that of Japan or the United States; when the secondary production in France, the Netherlands, and the United Kingdom is added, the total tonnage is more than a million tons greater than in either Japan or the United States. Furthermore, growth in the Italian and West German secondary aluminum industry through the last decade has been quite high.

Eastern Opportunities Abound

It is difficult to gauge how the changes m Eastern Europe will affect the secondary aluminum industry in Western Europe. What is known is that in recent years Eastern Europe has supplied between 6 and 27 percent of Western Europe's annual scrap and remelt ingot needs; although the trend has fluctuated, the figure has remained close to the low end of the range.

No doubt, Western Europe's secondary aluminum industry will benefit from any increased demand from Eastern Europe. In addition, the same grounds that indicate the p sectors in Western Europe will benefit from providing finances to Eastern Europe apply to some extent to the secondary industry's ability to gain market share in this expanding region.

The Western European secondary sector could benefit from development of small, low-capital smelting units in East Europe, much as Japanese secondaries have profited from small secondary centers m other parts of the Pacific Rim region. The availability of local scrap, combined with Western European investment and financial and technical support, could make Eastern European secondary aluminum units commonplace.

Environmental controls in Eastern Europe are, and likely will continue to be, less rigid than the requirements that are increasing day by day m Western Europe and are having an enormous impact on the secondary aluminum industry throughout Western Europe. As the costs of complying with environmental controls increase, a number of financially secure large producers are developing at the expense and demise of smaller secondary units.

Use of aluminum in the secondary industry, particularly in the automobile sector, is likely to rise. While this is encouraging, the European secondary sector continues to feel the threat of eroding profit margins, due to both the competitiveness of scrap sources and the escalating costs of environmental compliance. Therefore, it appears that the secondary aluminum smelters in Europe can look forward to rationalized growth over the next few years, but Europe must respond promptly and effectively to the various opportunities presented it to succeed.

Concerns on the Scrap Side

An overview of the aluminum scrap processing industry in Europe is generally encouraging: Technical improvements and developments have bettered scrap segregation and sorting abilities and increased quality standards. In addition, increased demand is expected from primary and secondary producers.

The success of scrap aluminum as a raw material, however, is threatened by the plethora of complex and often unrealistic legislation being implemented throughout Europe. As in the United States, the very movement of scrap across borders is being threatened by legislation that wrongly embraces recyclables as "waste." The Bureau International de la Recuperation is doing its utmost to convince European and other legislators that the continued viability of the aluminum scrap processing industry--and its primary and secondary consumers--is severely impaired by this waste designation.

The supply of aluminum scrap into Europe primarily depends on currency factors. The unpredictable, enormous swings in values of European currencies in comparison to the U.S. dollar have had more of an effect on movement of scrap into European consumption facilities than have primary prices listed on the London Metal Exchange (LME). This situation, however, could change since there are some discussions of using some type of secondary ingot contracts--which would have a closer relation to secondary aluminum pricing than current indicators--as a hedging vehicle on the LME.

Europe's scrap processing industry also will be affected by the likelihood that increasing aluminum scrap supplies will come from the Third World. And as with other segments of the aluminum industries in Europe, demand developments in Eastern Europe will play a role in the scrap sector, particularly if new secondary ingot production in Eastern Europe becomes reliant on the supply of scrap from overseas.

Putting It In Perspective