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Will 2013 be the year when aluminium breaks out of its malaise?

Dan Sandoval January 18, 2013

More than many metals, the global aluminium industry has struggled with overcapacity. Despite significant capacity cuts by major aluminium producers during the past several quarters, aluminium continues to struggle with finding a base from which to grow.

Longer term, global demand for aluminium is expected to grow. This optimism is underpinned by the growing world population along with urbanization in developing countries. According to several reports, global aluminium consumption is forecast to increase by 6.5% per year between 2011 and 2015, reaching about 58 million tonnes in 2015.

However, these positive numbers mask some short-term challenges. The aluminium industry could experience problems throughout the supply chain during the first half of 2013. A key concern is continued global overcapacity.

Recognizing this, many of the largest aluminium producers have taken steps to slash production capacity. In early 2012 Rio Tinto, Alcoa, Norsk Hydro and BHP each announced sizable production cuts or canceled construction plans to build additional aluminium capacity, removing around 1.3 million tonnes of production capacity by the end of 2012.

The challenges to the aluminium industry also are illustrated by Moody’s Investors Service considering downgrading Alcoa’s debt to less-than-investment grade in light of sharp declines in aluminium prices, which dropped by close to 22% on average through the end of the third quarter of 2012. Other U.S. ratings agencies, including Standard & Poor’s and Fitch Ratings have Alcoa listed at their lowest investment grade ratings.

Despite these downgrades to Alcoa’s credit ratings, during the company’s recent Investor Days program, a number of Alcoa’s top executives displayed a positive outlook.

Tim Reyes, Alcoa president of materials management, noted that demand for global primary aluminium will reach slightly more than 46 million short tons (roughly 42 million tonnes) in 2012, a 6% growth rate on a year-on-year basis versus 2011. “The generator, or the driver, of growth, again, has been China. We see China growing at 9%. Now, that 9% is a reduction from our original forecast of 11%.”

Reyes also said the slowdown in the second-half of 2012 likely affected Chinese demand. “So, in the first half ,we did see China growing 11%. However, we’ve lowered our second-half forecast down to 7%,” Reyes added.

“In the balance of the world, we’ve held our forecast to 3% growth year-on-year,” he said.

Most notable, Reyes said, was continued weakness in Europe, which declined 2% year-on-year in 2012. He added that North America was “the shining and glaring positive factor” in the developed countries, growing at 4% for the year.

Reyes also referred to Alcoa’s previous expectation of a doubling in primary aluminium demand from 2010 to 2020, with emerging markets, namely China, driving that growth.


Short-Term Ooutlook

Regarding the short-term outlook for aluminium, a representative from Harbor Aluminum Intelligence, a Laredo, Texas-based consulting group, says the bottom line for the foreseeable future is weak demand, especially in Europe. Other regions of the world that may struggle during the next several quarters likely will be parts of Asia and Oceania. He says contraction likely will be one of the key issues driving aluminium markets in 2013.

In the European market, the aluminium industry likely will see continued production capacity contraction. “We will see more shutdowns throughout the year,” the representative from Harbor Aluminum Intelligence says. The capacity cuts will likely trend along with demand, he says, helping supply and demand to remain in balance.

On the positive side, he says he sees the Middle East as a region of the world that holds better growth prospects for the aluminium industry. Additionally, the North American market should continue to show some growth, the representative from Harbor Aluminum Intelligence says.

Supporting this bullish outlook for aluminium in the Middle East is a recent report, Aluminum Scrap and Recycling Market in the GCC, by the research firm Frost & Sullivan. The report forecasts the aluminium scrap market in the Middle East, primarily in the Gulf Cooperation Council (GCC), which consists of countries in the Arabian Peninsula (Saudi Arabia, Kuwait, Bahrain, Qatar the United Arab Emirates [UAE], the Sultanate of Oman and the Republic of Yemen) should see the aluminium scrap market grow by greater than 10% per year through 2017.


The Growing Gulf Region
The aluminium scrap and recycling market in the GCC was estimated at 292,281 tonnes in 2010 and is expected to reach 593,434 tonnes in 2017 at a compound annual growth rate of 10.6%, Frost & Sullivan notes.

In Aluminium Scrap and Recycling Market in the GCC, Frost & Sullivan also say that the GCC aluminium recycling market is at an early stage of development and is largely an export-driven market. Further, the report notes that the aluminium downstream industry in GCC countries has yet to establish itself as a major scrap procurer in this region.

Thirty-five to 40% of the current market volume of aluminium scrap in the GCC comes from used beverage cans (UBCs), while 30% to 35% comes from door and window scrap. Engine scrap accounts for 11%; wheel scrap, 5%; sheet scrap (taint and tabor), 4%; and cable scrap (talon) and other types of mixed alloy scrap, about 6%.

The aluminium remelting facilities that consume the scrap and form alloy grades based on customer requirements are primarily present in the UAE, Bahrain and Saudi Arabia, with few key players in the rest of the region.

Considering the region is a global player in aluminium production and a valuable source of export revenue apart from serving the booming domestic market, the GCC has planned development of new aluminium smelters in Saudi Arabia and the expansion of existing smelters in Qatar, the UAE, Oman and Bahrain.

“The GCC is one of the fastest growing aluminium markets in the world,” the Frost & Sullivan report notes. “With the development of new smelters and expansions, more secondary remelting opportunities will arise,” the report states. “Additionally, the emergence of the packaging industry, growth in automotive, construction and consumer sectors in the GCC are expected to further drive the aluminium scrap generation. Frost & Sullivan therefore anticipates the secondary aluminium market in the GCC to be a key contributor to the recycling industry and create huge employment opportunities in the next 10 years.”


Challenges Ahead

In Europe, one of the few areas showing signs of improvement in terms of aluminium demand continues to be the transportation industry. In mature markets, including most parts of Europe, the transportation sector accounts for 42% of the end market demand for aluminium. The packaging sector accounts for 25% of aluminium consumption; construction, 13%; electrical, 8%; machinery, 4%; consumer goods, 4%; and other sectors, 4%.

In support of the positive outlook for aluminium in the transportation sector, some point to the focus on fuel efficiency and restrictions on carbon emissions in many developed countries. Because of its lightness, aluminium reduces the weight of a vehicle, decreasing fuel consumption and cutting hazardous emissions.

Several sources say that counterbalancing this steady improvement in the transportation sector is the housing and construction sector, which continues to be one of the biggest drags on the aluminium industry.

However, a report released by Moody’s Investors Service in the fall of 2012 notes that growth in the global auto industry in 2013 will be constrained by sluggish demand in Europe and weakening sales in China. This has caused Moody’s Investors Service to downgrade its earlier forecast. In comments following the report’s release, Falk Frey, a senior vice president in Moody’s Corporate Finance Group and the author of the report, notes, “We have revised our forecast for 2013 demand growth to 2.9% from our January forecast of 4.5%.”

Moody’s forecasts that Western European light vehicle demand will contract in 2013 by 3% compared with its January 2012 forecast of 3% growth.

Even China, which has been the go-to end market for a number of commodities, is showing signs of slowing automotive sales. In its report, Moody’s notes that it also lowered its light vehicle demand in China to 8.5% growth from its earlier expectation of 10% growth. This updated figure is in line with Moody’s revised 2013 GDP growth forecast for the country.

Moody’s says it expects to see more automotive manufacturers restructuring to tackle overcapacity in Europe. However, these efforts will only be credit-positive for automakers if the changes lead to capacity utilization rates of 90% or higher.


A More Positive Longer Term

Russia-based Rusal, the largest aluminium producer in the world, says that in developing countries the construction sector represents the biggest consumer of aluminium. The growing urban populations in these countries likely will necessitate substantial investments in infrastructure development, the company says.

In developing countries, the construction sector will comprise 37% of the end market for aluminium, with the transportation sector making up 19%; consumer goods, 15%; electrical, 15%; machinery, 6%; packaging, 4%; and other end markets, 4%.

Adding to the positive longer-term outlook for aluminium were recent statements by the Norway-based aluminium producer Norsk Hydro during its Capital Markets Day 2012. In discussing the outlook for aluminium, the company forecast world aluminium demand outside of China to grow by 2% to 4% in 2013, and longer term growth to be between 4% and 6% per year over the next 10 years.

However, Norsk Hydro concurs with other aluminium producers that the current high level of macroeconomic uncertainty and a multispeed world economy are weighing on consumer sentiment, leading to weaker prices and softer consuming markets.

For a boots-on-the-ground view, of the aluminium recycling industry, a U.K.-based secondary aluminium smelter says things are currently slow. “One issue that is causing some concern is the margin compression, which is making it more difficult to remain profitable,” he says.


The author is senior editor of Recycling Today Global Edition and can be reached at dsandoval@gie.net.

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