July/August 2008
Slowdowns in the U.S. construction and automotive sectors are shaping the short-term domestic demand picture, but China is again the dominant player in the global market for this metal. By Kim Fernandez
When the news media and economic analysts start talking about recession and a fall in consumer confidence, one of the first moves consumers make is they defer large purchases, such as a new house or a new car. Sure enough, U.S. consumers purchased 11 percent fewer cars in May 2008 compared with May 2007, according to Edmonds.com, and housing starts were down 31 percent in April 2008 compared with April 2007, according to U.S. Census Bureau data.
Much of that news is worrisome to aluminum recyclers. After all, in North America, nearly a quarter of all aluminum—nearly 6 billion pounds annually—is used in the production of cars and light trucks, according to the Aluminum Association (Arlington, Va.). That volume is growing as carmakers switch to lighter materials to improve vehicles' fuel economy. The third largest consumer of aluminum is the construction industry, which uses more than 3 billion pounds each year. Though commercial construction tends to use more aluminum than housing construction, the housing bust will almost certainly affect demand for aluminum products.
Decreased demand could mean a surplus for suppliers, assuming raw materials are plentiful and energy prices are low. This year, however, that's not the case. Energy prices are high, and some recyclers and brokers say they're having a hard time tracking down aluminum to recycle. For the moment, experts say, that's OK—the slight shortage of supply coupled with lowered demand keep the market in balance. And the second-largest aluminum-consuming sector, packaging, might see a slight jump in demand as more consumers express concerns about some types of plastic packaging. Aluminum bottles are gaining hold where plastic and glass have ruled for years.
Further affecting the aluminum market this spring was the massive earthquake that hit China, which is a major global consumer of aluminum scrap and raw materials. Though experts do not expect the quake to directly affect China's aluminum smelters, which have a total capacity of 15 million tons, the Chinese government subsequently shut down coal mines, chemical plants, and oil wells near the quake's epicenter to avoid further casualties in the hardest-hit areas. Any loss of energy in China could have an impact on both total aluminum production and prices.
All told, things are a tad slow for U.S. aluminum processors and buyers, but analysts hesitate to call this a downturn. "Healthy prices are keeping this from being a downturn," says Stephen Moss of broker Stanton A. Moss (Bryn Mawr, Pa.). "I think we're approaching a seasonal soft period, but that seasonal soft period [started] a little bit earlier this year."
Supply-Side Factors
"The underlying costs of making aluminum have gone up exponentially," says Blair Stewart of JW Aluminum (Charleston, S.C.). "A few years ago, the base price was 75 cents [a pound], plus or minus. A year ago, all the [higher] costs started to get rolled into that. And the most recent prices I've seen were around $1.20 for the base price of aluminum."
To start, primary aluminum comes mainly from bauxite, which is not mined in the United States. The leading producer of bauxite is Australia, followed by China and Brazil. The ore is plentiful, but the costs of mining and exporting it have gone up, thanks in large part to the cost of transportation. Further, it takes a lot of electricity to refine bauxite into alumina (aluminum oxide) and alumina into aluminum. Electricity costs can be 30 percent of total production costs, and that price is going up as well.
Smelters are feeling the pinch of rising energy prices "across the board," Moss says. "It's electricity, natural gas, diesel for shipping. Smelters are complaining that natural gas costs have not dropped from when they crept up two years ago, and they're looking to climb up more down the road."
High energy prices affect secondary aluminum as well, and those who process, broker, and export it. Moss says that watching fuel prices has become a daily ritual. "With diesel at $4.50 a gallon [in late May], every mile somebody has to go to ship or acquire scrap costs more. My freight costs are probably up 30 percent this year. Every time I buy metal, I'm really having to re-quote my freight."
The factors driving up the price of production—transportation and energy—are independent from demand, thus prices might remain high even as many expect demand to fall through the summer.
Domestic Doldrums?
The reasons for the expected summer decrease in demand are the gloomy outlooks for the automotive and construction sectors. The questions for some are how much those sectors are affecting the whole economy and whether the bad news continues into the fall.
"Automotive sales are going to hit a 10-year low later this year," Moss predicts. "General Motors says they have [more than] 100 days of inventory on hand, and they're not going to produce any more 2008 large-size trucks. Between the American Axle strike and [other] automotive issues, there is no pressure for them to restart their product right now." The slowdown has a ripple effect that hits other aluminum consumers, Moss explains. "Die casters need less metal right now, and they're worried about securing their future with automotive and outside of automotive," for example.
The construction industry is another story—but not necessarily a happier one. "We've had residential construction spending plummeting for the past several months," says analyst Catherine Virga of CPM Group (New York), "but nonresidential construction spending [had] been climbing high. In April 2008, we were only off in total construction spending by 6.7 percent from the peak in June 2006. The increase in nonresidential construction [had almost] completely offset the decline in residential spending." Now, however, even commercial construction projects are grinding to a halt, she says, and she now sees lower overall construction numbers in the United States in 2008. Decreases in construction affect "the rolling mills that create stock for siding, extruders, and windows," Moss says.
The falling construction market does not bode well for the overall economy. "The economy was doing rather well even with the weak automotive market and the weak housing market," Virga says. "Now that's changed. It's not just the weakness in the auto market anymore. It's construction spending, the fact that now industrial production is taking a hit, and the gross domestic product in general."
Others are not as worried about the U.S. economy or its effect on demand for aluminum. "I don't think the recession is as bad as the media makes it out to be," says Joel Fink of Allied Metal Co. (Chicago). No matter how high fuel or aluminum costs go, he says, "at some point, people need new cars, and that's a big driver of the industry. … It's a necessary commodity." Further, "because of the auto slowdown, secondary smelters are not having any difficulty securing scrap," points out Bob Garino, ReMA's director of commodities. And in the absence of demand elsewhere, the smelters are selling their alloys to the London Metals Exchange. LME NASAAC stocks are up 16 percent since the start of the year, Garino says.
The China Influence
Offsetting drops in domestic demand, many hope, is continued growth in China. Like many recyclers, those who specialize in aluminum say they've seen huge demand for both raw materials and finished metals from China, and experts say there's no end in sight. In late 2007, Xiao Yaqing, chairman and CEO of the Aluminum Corp. of China (Beijing), estimated that Chinese demand would rise 33 percent, to 12 million mt, by the end of 2008. That would be nearly one-third of total world demand.
"Commodities in general have been in short supply, and people attribute that to China for the most part," Stewart says. "They've had strong expansion. They're sucking up all the commodities in the world, aluminum being one of them. They've created a supercycle and driven the price of commodities"—including aluminum—"to astronomic heights." China's demand "adds an increase to the price and a volatility to the price," he says. "We've had exciting days and months."
Virga agrees that China's demand is driving much of the market. "In 2007, nearly all of the growth in aluminum consumption came from China," she says. Because of this robust demand—as well as power shortages in China, South Africa, and other countries—"we've really changed our outlook for aluminum this year and going forward for a couple of years" from the surplus that was forecast a year ago to a potential supply deficit.
China currently affects the supply side, too, by producing aluminum at a faster rate than it can consume it. "We're still seeing fairly sizeable exports of aluminum from China," Virga says. "It's a little bearish for the market." But many think that's about to change—Virga says she and others expect a Chinese government push to become an importer of raw aluminum but an exporter only of finished aluminum products, similar to a policy the country has undertaken with other commodities. "We're seeing reduced exports of lead as well as tin," Virga says. "China was supplying roughly one-third of the world's lead when they increased their duties on their exports. It definitely drives the market when that happens."
At press time, Virga was waiting to learn the longer-term impact of China's earthquake on the country's aluminum production facilities. "It looks like it's already been factored a little bit into prices, but not dramatically," she said two days after the quake. "The damage to existing smelter production was minimal," but the rebuilding process could affect demand in both the short term and the long term, she said.
Further, a rumored shutdown of all factories near competition sites for the Olympic Games in August has aluminum recyclers wondering what that might mean for the market, if it indeed happens. "Nobody knows what's going to happen leading into the Olympics, and whether [China's] demand will drop off dramatically," Moss says. "We hear there will be shutdowns of [aluminum] consumers within 100 miles of Beijing. But the costs are starting to hit the Chinese. The costs of aluminum and copper are starting to create some strains on their capital."
Scrap Supply Worries
Though tight aluminum scrap supply this spring and summer should help bolster prices as demand falls, many industry leaders worry long-term about increasing the recycling—and thus the supply—of aluminum scrap in the United States. Earlier this year, Alcoa (Pittsburgh) announced an initiative to increase U.S. household aluminum recycling rates. The company wants the country to achieve 75 percent used beverage can recycling by 2015; currently, the rate is about 52 percent. "Recycling rates should be a lot higher," Stewart says. "It puzzles me that, when you've got used beverage cans that are worth as much as a dollar a pound, that's not enough money to [convince] people to bend over and pick up a can on the side of the road." He thinks more states will enact deposit laws, forcing consumers to pay more for beverages but refunding some of that money when they recycle their UBCs.
A trend that has some potential to increase the use of aluminum in food and drink packaging is consumers' growing concerns about bisphenol-A, a monomer found in polycarbonate plastics and in the linings of metal food containers (including aluminum containers). Some scientists believe that infants' and children's exposure to even small amounts of BPA can affect development.
The Canadian government recently proposed banning polycarbonate baby bottles, though it called the risk to the general population from BPA in metal food containers "negligible." An April 2008 draft brief from the U.S. National Toxicology Program echoed the Canadians' concern about BPA's effects on infants and children. In May the U.S. Food and Drug Administration reaffirmed the safety of food in BPA-containing packaging, but it also launched a task force to evaluate the most recent research. Because the BPA in polycarbonate seems to be the biggest concern, some consumers are switching to food and drink containers made from other plastics, glass, stainless steel, or aluminum.
In an unrelated development, beer and soft drink companies are experimenting with aluminum bottles, which are shatterproof and reportedly keep liquids colder longer. The Coca-Cola Co. (Atlanta) plans to give out thousands of samples of Coca-Cola in limited-edition-design aluminum bottles in the United States as part of its promotions for the 2008 Olympics. PepsiCo., Anheuser-Busch, Snapple, and other major drink retailers also have begun using the packaging, though it reportedly costs three times as much as a glass bottle.
"I think it'll be interesting if we start to see vending machines carrying aluminum bottles," says Moss, who recently found resealable aluminum bottles containing Coke Zero at a street fair in Philadelphia. Stewart is watching the progress of this new packaging as well. "I see a lot of innovative design in the aluminum bottles," he says. "I think they're really coming out. I'm not sure if it's reversing the tide [of plastic], but I think it is stemming it and becoming popular." He thinks U.S. consumers will embrace aluminum bottles because of their inherent recyclability—unlike plastic containers, he says, they can be 100 percent recycled and reused an infinite number of times. Ironically, one manufacturer of aluminum bottles touts their 100-percent recyclability along with the fact that they're made from virgin aluminum.
Despite these developments, industry analysts and participants predict a gloomy summer for aluminum. "This may be a year when the ‘sell in May and go away' prognostication that you hear a lot in the scrap world may come true," Stewart says. Moss expects that "consumption will be off significantly through July, and then hopefully things will pick up going into the fourth quarter." •
Kim Fernandez is a writer based in Bethesda, Md.
Slowdowns in the U.S. construction and automotive sectors are shaping the short-term domestic demand picture, but China is again the dominant player in the global market for this metal.