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
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
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
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
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.