Followers of Nostradamus credit him with predicting all kinds of events—from the rise of Napoleon to World War II. But if the medieval seer had been tasked with forecasting the near-term future of the aluminum industry, he might have been left scratching his head.
It's tough to make any kind of prediction in an economy as uncertain as ours. The last time I took a stab at predicting the future, back in 2007, I suggested that while everyone was desperate for exposure to aluminum in boom times, they would run back to downstream assets just as quickly when the market collapsed.
On the face of it, that wasn't a bad guess. As our feature story this month shows, companies like Kaiser Aluminum that have focused on downstream assets are doing well as they are somewhat protected from the volatility of aluminum prices.
But before making another attempt at fortune-telling, it's important to examine exactly what has transpired since the bottom fell out of the market. In doing so, it's clear that those predictions I made more than two years ago may not have been quite as prescient as they sounded.
I had suggested that when the market dropped, private equity companies would run away from their investments in aluminum as quickly as they arrived in the first place. That, of course, has proven to be the case. But I also said that they likely would sell them back to the multinational metals conglomerates that had been so keen to shed themselves of downstream assets in order to give their shareholders maximum exposure to the metal price. That, of course, has not happened, and I think it's fair to say it is unlikely to occur.
The truth is that while certain downstream companies, including Kaiser, have prospered—or at least not suffered as much as some of the upstream players—it does not necessarily prove that, in a downturn, downstream is the place to be. The evidence for that is pretty clear, because the pages of AMM have been littered with stories of bankruptcies of rollers and extruders. From Aleris to Indalex, it's clear that being shielded from direct exposure to primary aluminum prices did little to help many North American downstream players.
Previously, I also essentially stated that in good times it's best to be exposed to (rising) commodity prices, and in bad times it's best to be in the value-added business because conversion margins tend to get eroded to a lesser extent than benchmark metal prices.
I think it's fair to say that assessment significantly over-simplifies the situation. It's certainly true that when metal prices are high, companies like to be in the primary business because investment dollars help inflate prices and shareholders reap the benefits. But it's not true to say that in harder times downstream assets automatically offer some sort of sanctuary.
The most important factor in recessionary periods is the markets a company is exposed to. That has been the real secret to Kaiser's success—not that they're distanced from the primary aluminum business, but that by and large they are not in the business of supplying the automotive and construction sectors. Much of their operations are focused on serving the aerospace sector, which has held up far better than some other major aluminum-consuming industries.
When all is rosy with the world, broad exposure is the way to go. When times are tougher, this makes you vulnerable to an equally broad decline, but that's probably still preferable to a narrow exposure to the wrong markets—a lesson that certain extruders, such as those who focused on automotive and construction, have found to their cost.
Back to those predictions for the future. This time, I'm going to pass the buck and suggest you read this month's feature story by Tom Jennemann on page 32, which I think neatly identifies some of the "new norms" of the aluminum industry, as described by industry players themselves.