Driving in circles

The direction of pricing in the metal and minerals portion of the commodity market in 2015 was almost uniformly downward. Although aluminium was not an exception to this trend, the light metal has shown comparative strength in its pricing, thanks largely to its growing role in the automotive sector.

Demand for finished and semifinished aluminium, as well as for scrap and other feedstock that is used to make it, has retained some momentum in early 2016, a testament to the metal’s fortitude in the face of widespread woes in the global commodities market.

The aluminium industry, however, is not without its challenges, including perceived overcapacity in China and other parts of the world. Another cause of concern is a scenario in which global economic decline puts the brakes on the good times in the auto industry.

Compared with the woes in the steel or stainless steel sectors, however, aluminium producers tend to foresee a healthier near-term future, especially if the worldwide demand for cars and trucks continues apace. In terms of the price of aluminium enjoying any upward momentum, the onus seems to fall on the automotive sector on the demand side and China on the supply side.

RELATIVELY BRIGHT

Aluminium is used in a wide variety of applications. Although no single end market is dominant, transportation is the No. 1 consuming sector, according to 2014 global statistics from Statista.com.

The transportation sector’s leading share, however, is just 27%, followed closely by the construction and building products sector, which consumed 25% of the aluminium used to make new products in 2014.

That 27% end market sector can be particularly critical to the scrap industry, however, since the aluminium made by many secondary aluminium producers is used to manufacture auto and truck components.

In early February 2016, aluminium scrap traders and processors in the United States report seeing healthy demand from such secondary producers for aluminium scrap. “Domestic demand is strong and seems to be picking up as we enter February,” says Stephen Moss of Pennsylvania-based brokerage firm Stanton A. Moss Inc.

Jeffrey Mallin of wire and cable processing firm Mallin Cos., based in the U.S. state of Missouri, calls demand for aluminium scrap “one of the few brighter spots of the commodities.” Mallin adds, “There is interest in aluminium scrap beyond current orders, as scrap volumes are so low and sales [offers] must be decent if buyers are looking for more metal.”

“For the moment, it definitely feels like we have shifted from a buyer’s market to a seller’s market,” says Matt Kripke of Ohio-based brokerage Kripke Enterprises. However, he is unconvinced that scenario will stay in place. Kripke characterizes demand as “lukewarm,” saying, “As soon as supply picks back up, I anticipate it will be difficult to place metal again, like most of last year.”

Kripke’s concerns could stem from multiple sources, but one foremost worry is the notion of a repeat performance of what has plagued the steel industry: The continuation of massive finished metal production in China at a time when internal demand is waning.

The overcapacity situation in China’s steel industry has had dramatic negative impacts on the world’s steel producers (and the ferrous scrap market), and aluminium producers and their trade groups have been sounding the alarm about the parallels in their market.

AN UNWANTED COMPARISON

Concerns regarding overcapacity are apparent in some reports prepared by recyclers and traders around the world for the February 2016 edition of the Bureau of International Recycling (BIR) World Mirror: Non-Ferrous Metals.

Experiencing waning domestic demand for aluminium scrap, Alejandro Jaramillo of Mexico’s Glorem SC writes, “We need to consider a market still limited in size facing increased flows of primary, ingot and imported scrap: This might well be the reason for little or no domestic scrap demand.”

Japan, with an aging population, is one place where the auto industry is not growing, which is proving unhelpful for the domestic aluminium industry. “Aluminium alloy production and shipments dropped by, respectively, 6.1% and 5.6% last year as Japanese car production declined on slow domestic sales,” writes Shigenori Hayashi of Japan’s Daiki Aluminium Industry Co. Ltd.

Hayashi also says sees imported finished aluminium as a source of concern in 2016. “Prices of ADC12 aluminium alloy offered by Chinese and Russian smelters dropped by US$ 60-to-$70” per tonne in January 2016, he writes in the World Mirror.

In China itself, Shen Dong of the Shanghai office of U.S.-based OmniSource writes, “It has been a tough 12 months for [the] secondary aluminium sector. Given the gloomy commodity markets and soft demand, we are seeing more scrap traders and consumers adopting a bearish attitude instead of the traditional bullishness for the [February 2016] period after the Chinese New Year.”

If that bearishness in China results in scaled back aluminium production, it might be welcome in some other parts of the world.

The U.S.-based Aluminum Association has a Web page within the “advocacy” section of its website www. aluminum.org, devoted to the issue of “China & Trade.” Here, the association expresses concern that much of China’s newly added aluminium production may have been commissioned hastily (and thus unnecessarily) and may not be legitimately competitive globally.

“Much of this expansion was driven by artificial incentives, subsidies and central planning by the Chinese government,” the trade group says. “This behaviour led to smelters being built even when doing so made little economic sense. Indeed, of the 50 highest-cost aluminium smelters in the world, 37 are in China,” the Aluminum Association adds.

In the steel sector, overcapacity in China has had dramatic effects as its own economy has cooled and its pace of infrastructure building and urbanization has slowed. Steelmakers there (many of them state-owned enterprises) have continued to produce steel in volumes way beyond what is required by the “new normal” of the Chinese economy.

Aluminium producers in America and other parts of the world fear this unfolding in China in their sector. According to Aluminum Association data, “U.S. imports of semifabricated aluminium products from China grew 115% between 2012 through 2014, and this trend is continuing. The current situation is bad for China and bad for the rest of the world,” the trade group says.

The association’s 2015 statistics, which are published by the United States Geological Survey (USGS), Reston, Virginia, show aluminium imports rising again based on data for the first 11 months of the year.

The U.S. imported 4.22 million tonnes of finished and semifinished aluminium and alloys in the first 11 months of 2015, up another 7.4% from the 3.93 million tonnes imported in the first 11 months of the prior year.

China was far from the sole supplier of this metal, however, as it shipped about 365,000 tonnes of the 4.2 million 2015 total. By far the largest supplier of finished or crude aluminium to the U.S. is NAFTA (North American Free Trade Agreement) partner Canada, which sent nearly 2.3 million tonnes (54%). Canadian producers have been benefiting recently from their weak dollar, which encourages exports to the U.S.

Outside the bounds of that NAFTA relationship, however, China with its 365,000 tonnes shipped, followed by Russia (284,000 tonnes) and the United Arab Emirates (263,000 tonnes), were by far the largest overseas suppliers of finished and semifinished aluminium to the U.S. in 2015.

Aluminium producers in North America certainly can argue that if any of this inbound material was unfairly subsidized, it has reduced their opportunities to boost their own production. Financial reports indicate some of these firms are faring better than others.

MAKING ADJUSTMENTS

While many recyclers bemoaned the state of the aluminium industry in 2015 and express concerns for 2016, some producers of the metal found ways to be profitable in the prior year.

Mexico-based Nemak, an aluminium producer with 35 plants in the Americas, Europe and Asia, saw its EBITDA (earnings before interest, taxes, depreciation and amortization) rise by 8.1 percent in 2015, from $702 million in 2014 to $759 million last year.

With three-quarters of its 2015 fiscal year complete, U.S.-based Aleris Corp. touted EBITDA of $183 million, with its third quarter 2015 earnings improving over the third quarter of 2014, even though falling prices yielded less revenue for the company.

Atlanta-based Novelis, part of India’s Hindalco Industries and the Aditya Birla Group conglomerate, reported a net loss of $67 million in its fiscal year’s first three quarters, down from a $119 million profit in the comparable period in the previous fiscal year.

The company says its year-to-date losses stem from first quarter “semiannual bond interest payments and capital investments in maintenance and strategic growth projects.” In its third quarter, Novelis reported net income of $32 million.

Pittsburgh and New York-based Alcoa Inc. is in the midst of splitting into two companies, one that will concentrate on crude aluminium production and the other on downstream products.

The company has reported a fiscal year 2015 net loss of $765 million, with its Chairman and CEO Klaus Kleinfeld citing “harsh headwinds, with prices for alumina down 43% and aluminium down 28%.”

Considering the direction of commodity pricing in 2015 and early 2016, both producers and recyclers of aluminium have little reason to relax. The challenges of a global market that have worldwide ripple effects will doubtless continue.

The author is editor of Recycling Today Global Edition and can be contacted at btaylor@gie.net.