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Aluminum industry '12 outlook positive amid mixed signals

Keywords: Tags  aluminum outlook, Alcoa, The Aluminum Association, Heidi Brock, Klaus Kleinfeld, Kaiser Aluminum, Century Aluminum, China aluminum demand

Whether the climate for aluminum these days is seen as partly cloudy or partly sunny depends on who’s doing the forecasting and when they’re doing it.

In mid-January, it was announced that aluminum orders in North America rose 18.1 percent in December from the previous month on the back of some economic recovery in the United States, according to Davenport & Co. LLC data based on seasonally adjusted figures from the Aluminum Association. That led to some optimism.

But industry giant Alcoa Inc. forecast slower-paced growth in 2012 following its fourth-quarter 2011 earnings results, which included the aluminum producer’s first quarterly net loss since the beginning of 2010. That led to some pessimism.

On the other hand, the Aluminum Association said that although the construction sector had lagged for the light metal, the association was hoping “green” construction could provide some growth. “Those markets aren’t very strong right now, but we think it’s good timing to do marketing and analytical work to position ourselves in the future and lay down the groundwork for that,” Aluminum Association president Heidi Brock said.

And so uncertainty continues to dominate the aluminum market outlook, although an increasing number of producers, traders and analysts are predicting modest growth for the industry.

“After falling in four of the past five months, orders showed a strong increase in December, which keeps orders in a choppy, subpar uptrend in our view,” analysts at Richmond, Va.-based Davenport said in a research note. Davenport expects orders to continue moving higher this year as the economy continues to recover. “The economy appears to be building on the momentum that occurred in the fourth quarter. Additionally, the recent rise in aluminum prices, if it continues, may spur buying by customers in the first quarter,” Davenport said.

Total aluminum orders last year rose 6.5 percent compared with 2010. All categories saw an increase, barring foil, which dropped 5.6 percent, and can sheet, which slipped 1 percent.

Despite its earnings disappointment, Pittsburgh-based Alcoa expects global aluminum demand to increase 7 percent and North American demand to grow 3 percent, Alcoa chairman and chief executive officer Klaus Kleinfeld said during an earnings conference call. The company had forecast 2011 growth of 12 percent.

Those expectations come on the heels of a year of falling aluminum prices and production curtailments at global facilities. Those falling prices and increasing production costs required the company to act “aggressively,” chief financial officer Chuck McLane said during the conference call.

Early this year, the company announced that it would close or curtail 531,000 tonnes of annual smelting capacity. The company had warned in November that such a move was a possibility if aluminum prices continued to decline. “These decisions are never easy,” Kleinfeld said. “(We) work very, very hard to find solutions to minimize the impact on communities as well as our employees.”

Alcoa posted a net loss of $191 million for the three months ended Dec. 31, in contrast to net income of $172 million in the third quarter and $258 million a year earlier. Despite the loss, the company remains optimistic on some fronts. Alcoa is forecasting demand growth of 10 to 11 percent in the aerospace sector and 3 to 8 percent in the automotive industry. Overall, the company projects a global primary metal deficit of 600,000 tonnes in 2012.

Alcoa’s news was just the latest in what has been up-and-down developments over the past six months or so. Equity markets fell in August, with the Dow Jones Industrial Average dropping more than 4 percent, while fears of a double-dip recession mounted, prompting aluminum customers to delay signing 2012 contracts despite executives preaching calm during the earnings season.

“It almost seems like we’re worrying ourselves into another recession,” Kleinfeld said in an October interview with CNBC. “We see a world frozen by fear and cooling-down growth.” At the time, Kleinfeld reaffirmed his original forecast that the aluminum industry would experience 12-percent growth in 2011, adding that he expected China to lead the way in 2012.

Similarly, top executives at both Kaiser Aluminum Corp. and Century Aluminum Co. remained optimistic despite disappointing third-quarter results, and offered strong forecasts for the automotive, aerospace and transportation sectors.

But others remain wary of Europe’s evolving debt crisis. Orkla ASA president and chief executive officer Bjørn Wiggen preached caution during the Norwegian company’s third-quarter earnings conference call. Orkla subsidiary Sapa “is seeing a trend of softening markets in the extrusion business in all regions in Europe as well as North America,” he said.

And while the price of aluminum could fall further in the near-term, most agree that it will go up in 2012. “(Aluminum) is pretty cheap now. Short-term it could go lower, but medium- to long-term, it’s too low,” one trader said.

“At some point in the near-term, the price will start to turn,” Davenport research analyst Tim Hayes said. “People will gain confidence in 2012 once it’s shown that the economy is not in a recession, then hopefully this negative sentiment will dissipate and that will take prices higher. Consumers are not retrenching as much as the media is suggesting, and we’re continuing to add jobs, albeit at a frustratingly slow pace.”

Few traders believe aluminum premiums will deviate much in 2012 as London Metal Exchange-listed warehouses continue to hold on to millions of tonnes of aluminum, keeping availability tight and prices high.

Even though warehouses holding more than 900,000 tonnes of metal will have their load-out rates increased to 3,000 tonnes per day starting in April from 1,500 tonnes per day currently, most do not expect it to have an impact on premiums as long as interest rates remain near zero, which will encourage producers and traders to continue storing aluminum in warehouses under financing deals, provided the contango on the LME remains in effect.

Most market participants agree that China is the country to watch in 2012. Kleinfeld, who is confident that China will drive aluminum growth, said China’s story is interesting because the country does not have a sustainable aluminum industry, given high power costs, which could provide opportunities for Western companies to partner with Chinese firms. Some 15 of 22 provinces in China have seen power prices rise, while 37 percent of Chinese alumina refineries are in the top quartile of aluminum cost-curve production. “That’s not a sustainable industry structure,” Kleinfeld said.

There are, however, opportunities for Chinese infrastructure. “We think the China infrastructure buildout has several more years left,” Hayes said, forecasting 14-percent growth. “The interior of the country is far from being built. That will drive all commodities—including aluminum.”

Gayle Berry, vice president of commodities research at Barclays Capital, agreed. “In terms of China, I’m very positive,” she said at a Metal Bulletin conference last fall, adding that impressive growth rates there were offsetting soft vehicle production sales.

Still, some point to a potential real estate bubble forming. “We need to watch China,” one market participant said. “There’s evidence that says the Chinese economy is slowing down. The real concern is about the extent to which their building and property market has been overheated. . . . It’s key to what’s going to happen in terms of price.”

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