Aluminum Consumers Working Through Inventories

Prices may not reflect it, but the demand for aluminum is growing, and if dealers had more aluminum scrap they would have no problem finding buyers.

That was the consensus of speakers at the Aluminum session of the Institute of Scrap Recycling Industries Inc. (ISRI) Commodity Roundtables, being held this week in Chicago.

Industry analyst Stuart Spector of the Spector Report, Boynton Beach, Fla., said that industry figures seem to indicate that inventories of aluminum on the LME and elsewhere are being depleted—although there is a catch.

For the past several months, new stocks of aluminum have been appearing at several LME warehouses. According to Spector, the warehouse locations match up with areas where former Enron subsidiary H. Bath Ltd. used to do business. He speculates that the person managing the H. Bath position after Enron exited the market has been slowly putting this material back onto the LME floor, causing a “stealth rise” in LME ingot supplies.

Beyond this anomaly, however, a reviving U.S. economy and continuous industrial growth in China are combining to put aluminum in demand.

“What is basically holding back the U.S. economy is the manufacturing sector, partially because of just-in-time inventories and also some un-ease about the future,” said Spector.

The amount of produced material held in inventory has declined significantly over the past 10 years. “It now takes a stronger uptick before manufacturers will increase their inventory,” Spector noted.

Inventories held across the manufacturing sector temporarily peaked in January of this year, but have since been falling off. “Now, with very low inventories, one of these days you’re going to get a rebound,” said Spector. “A stealth recovery is in process, even though the media does not seem to be reporting it.”

Dietrich Gross, CEO of Jupiter Aluminum, Hammond, Ind., agreed that manufacturers would soon need to build their inventories back up. “Inventory is very tight in the metals industry in general. If there is a major demand, you will see short-term shortages [of some metals],” said Gross. “Tightness in supply usually translates into increased prices.”

Gross predicted a short war with Iraq would lead the U.S. economy into 2003. “The year that comes should make up for some of the recent losses. After that you will have a period of even greater prosperity.”

Chris Petersen of Honda Trading America, Marysville, Ohio, said the automaker’s North American operations are now building nearly 700,000 vehicles, one million aluminum engine blocks and cylinders and 750,000 aluminum transmissions at its Ohio plants. The company is also starting to assemble vehicles and make cast aluminum parts in Alabama.

Honda also generates scrap and circulates much of it in a closed-loop system back to first-tier suppliers and its own operations. “Theoretically, this scrap is a guaranteed feedstock to our own supplier base. This helps ensure they can meet our needs,” said Petersen.

The Ohio-built Honda Accord averages 283 pounds of aluminum, not including the wheels. Most of that is found under the hood, and according to Petersen the use of exterior panel aluminum is not being seriously considered. “Honda has not been very aggressive in using aluminum sheet. We’ve evaluated it,” he remarked, but it is not cost-competitive.