ISRI Aluminum Spotlight: Continued weakness in automotive sector expected to weigh on aluminum

ISRI Aluminum Spotlight: Continued weakness in automotive sector expected to weigh on aluminum

Speakers during the ISRI Virtual Event: Spotlight on Aluminum discussed the effects of the COVID-19 pandemic and Section 232 tariffs.

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June 1, 2020

Aluminum scrap processors and consumers already were facing challenging market conditions before the COVID-19 pandemic was declared earlier this year. Speakers during the Institute of Scrap Recycling Industries (ISRI) Virtual Event: Spotlight on Aluminum discussed how the pandemic and has served to exacerbate those challenges as demand from the transportation sector and other industries was reduced.

Jason Schenker, chairman of The Futurist Institute and president of Prestige Economics, Austin, Texas, said he expected auto sales to remain weak as the year progresses. Motor vehicles accounted for the bulk of the drop in sales of goods in the U.S., leading almost to a full percentage point reduction in gross domestic product (GDP) in the U.S. Fleet purchases at rental car companies will be reduced because of decreased travel, and rental cars will be dumped on the market, Schenker predicted, adding that increased availability of used cars depresses demand and pricing for new cars.

“More than 1 in 4 people are unemployed right now,” he said, adding that that does not bode well for the automotive and housing markets. “If we have seven or eight months of 10 percent unemployment, we will be lucky.”

Service-based economies have taken the biggest hit from the COVID-19 pandemic, he said, adding that “[this] is where we see the most pain.” Therefore, developed economies that tend to be more service-based declined roughly 6 percent, while emerging economies saw a 1 percent decline in their GDPs related to  COVID-19 shutdowns.

“As we think of aluminum and metals demand, the most important thing to really consider is these emerging markets, where you are seeing some of the biggest increases in growth over time. They will probably be back to flat, in other words, their GDP in Q4 2019, we’ll probably be back to that for emerging markets next quarter.”

In the U.S., consumption of goods and services accounts for 70 percent of the economy, Schenker said.

He predicted two consecutive quarters of contraction in the U.S., with a rebound in GDP in the third quarter of the year. “I do expect June data to improve significantly.”

Modest growth of 1.8 percent and 2 percent, respectively, is expected for 2021 and 2022 in the United States, Schenker said.

“There is going to be a bit of a mixed bag for aluminum going forward,” he said, as aluminum will be weighed down by the automotive sector but supported by nondurable goods consumption.

“Aluminum is a really good proxy for global growth,” Schenker continued. “It actually is a better proxy for global growth than copper because of how and where it is consumed.” He added that manufacturing will bounce back relatively quickly, particularly in developing countries.

“It is going to take two years from now for [U.S.] GDP to be where it was at the beginning of this year.”

By 2022, Schenker said he expected aluminum to be “firing on all four cylinders,” with pricing in the $1,800-to-$1,900 range.

John Woehlke of JW Metal Consulting, Nashville, Tennessee, said, “The fundamentals [for aluminum] don’t look great; they certainly don’t look as good as what we’ve seen in the stock market in the last 30 days.”

He mentioned a couple of trends that he thought were important for the aluminum industry, namely the Department of Commerce’s exemptions that have practically nullified the Section 232 tariffs enacted by the Trump administration in 2018. (See “Paying the duty” in the 2020 Scrap Metals Supplement to Recycling Today at www.recyclingtoday.com/article/aluminum-tariffs for more details.) Woehlke said the Department of Commerce ran and ran on the exemptions, issuing 45 times the number of can sheet import exemptions in March of this year than were issued in 2018. “That amount … is twice the entire market in the U.S. for something the domestic producers usually have a 95 to 97 percent production share of,” he said.

Can sheet and automotive production in the U.S. account for 2 million tons each in terms of finished weight annually, Woehlke said. “The lack of protections for can sheet should be of meaningful concern for the scrap industry,” he added, noting that real demand growth for can sheet in the U.S. has occurred but has been offset by the growth in imported sheet. “We are going to see markets growing, but we are not going to see it trickle down to the scrap side,” because of the exemptions, Woehlke added.This should be of "material concern" to scrap processors, he said. 

Declining automotive demand is a “big problem” for cast aluminum, Woehlke added. “In flat rolled, it’s also an issue.”