While the overall North American aluminum market is strong, with a lot of potential for future growth, it remains a tale of two industries, with demand by construction and other non-transportation sectors much more lackluster than automotive and aerospace.
We knew that it would be a long, slow, sluggish recovery coming out of the recession compared with most other recoveries, and that has definitely been the case, said Keith Harvey, senior vice president of sales and marketing for aerospace and general engineering at Kaiser Aluminum Corp., Foothill Ranch, Calif.
Nevertheless, North America is clearly one of the brighter spots globally, according to Gordon Hamilton, vice president of primary metals sales and marketing for Rio Tinto Alcan, Montreal. Overall, North America has been among the most resilient markets, seeing a big bounce back in 2010 and remaining fairly steady ever since, he said, having not suffered the contagion from the European debt crisis that Asia has been experiencing.
On a volume basis, there has been fairly significant improvement, said Bill Sales, senior vice president for nonferrous operations at Los Angeles-based Reliance Steel & Aluminum Co., but how significant that improvement is depends on the market that a particular company targets.
Lloyd OCarroll, senior vice president of research at Richmond, Va.-based Davenport & Co. LLC, agreed. While there are still some soft areas and overall growth has slowed somewhat compared with earlier in the year, he expects overall domestic aluminum shipments will be up about 8 percent this year, with another 4-percent increase in 2013.
Tom Walpole, senior vice president of Atlanta-based Novelis Inc. and president of Novelis North America, said that the industrys solid growth since coming out of the financial crisis has been particularly impressive, given that the can market, which accounts for about 40 percent of all flat-rolled aluminum consumption, has actually been quite flat.
OCarroll wrote in the Davenport Quarterly Aluminum Outlook third-quarter report that after rising 3.2 percent to 4.49 billion pounds in 2011, can sheet shipments are expected to inch up 0.5 percent to 4.52 billion pounds this year before retreating to 4.51 billion pounds in 2013 as a slight gain in beer packaging is more than offset by a decline in soft drink cans.
Hamilton said that there will likely only be modest growth in the mature can market. However, single alloy formulations for both the can end and the can body are being worked on in the sector, and this will be an interesting development which will allow for improved recycling rates and hopefully increased attractiveness for this form of beverage packaging. That would be a big positive to the industry, Hamilton said.
Transportation continues to lead demand, with both the automotive and aerospace markets being particularly strong, but strength in the truck-trailer market seems to be softening somewhat, according to Kamil Wlazly, senior metals analyst for Metal Bulletin Research.
Just a few years after North American production of light vehicles was essentially cut in half to 8.6 million vehicles at the depth of the economic downturn, it rebounded to about 13 million vehicles in 2011 with expectations of 14.3 million vehicles this year and 15 million in 2013, by OCarrolls estimates. According to Walpole, a lot of that is pent-up demand, with the average age of vehicles on the road around 11 yearsÑmuch older than it had been for decades. Better availability of financing and low interest rates also have helped, he said.
OCarroll said that aluminum shipments to the automotive market will continue to see respectable increases, although at rates below the rebound years of 2010 and 2011. He estimated that U.S. auto aluminum shipments will increase 13.1 percent to 3.8 billion pounds in 2012 and rise another 9.6 percent to 4.2 billion pounds in 2013.
An Aluminum Association spokesman said this is being accomplished not just through an increase in vehicle production but also through increased aluminum content per vehicle. The spokesman cited a recent report from Ducker Worldwide LLC, Troy, Mich., predicting that average aluminum content would increase from 343 pounds per vehicle in the 2012 model year to about 550 pounds by 2025, spurred by new corporate average fuel economy (CAFE) standards, which require passenger cars to achieve 35.5 miles per gallon by 2016 and 54.5 miles per gallon by 2025. There are only a limited number of ways that automakers can get to those numbers, the spokesman said, noting that they could make vehicles smallerÑbut Americans like trucks.
Harvey noted that while some of the fuel efficiency is being accomplished by new engine technologies, the lions share is being achieved through lightening the weight of vehicles while not compromising safety.
Klaus Kleinfeld , chairman and chief executive officer of Pittsburgh-based Alcoa Inc., said during the companys third-quarter earnings conference call that not only are CAFE standards getting more restrictive, but consumer behavior is shifting. He said that according to Consumer Reports, 54 percent of potential buyers in 2008 were willing to pay more for fuel efficiency; that number is now up to 83 percent, and 37 percent of consumers rate it as their No. 1 buying decision factor.
Aerospace also continues to be a very promising market for aluminumÑone that appears to have legs going forward, given the record backlogs for commercial aircraft, which are stretching out seven to eight years, Sales said.
OCarroll said that not only are aircraft deliveries expected to increase 12.5 percent to 1,310 planes this year and another 9.5 percent to 1,435 planes in 2013, but production of wide-bodied aircraft likely will grow faster than narrow-bodied models. This trend favors metal content, including aluminum, he said. He projected that aluminum shipments to the aerospace market will increase 15.8 percent to 660 million pounds this year and a further 8.9 percent to 719 million pounds in 2013.
Apart from transportation, all other markets are struggling equally, including not just building and construction but also so-called general engineering applications, Wlazly said. Building and construction is seeing a little recovery but is still not great, with residential construction in particular struggling, compounded by the increased penetration of plastics, he said. On the bright side, housing starts have begun a modest pickup, including in single-family homes. They have lagged multi-family starts, however, which have been relatively strong for much of the year, according to the Aluminum Association spokesman.
But even though single-family housing starts have increased to about 700,000 per year from a low of 500,000 to 600,000 in 2009, it remains far below peak levels of 2.1 million starts in 2006. While housing is off the bottom, it will be a long recovery before normal levels are reached, Harvey said.
Meanwhile, Sales said commercial construction is doing a little better, particularly for such public works projects as hospitals and defense installations. Also, metal roofs are picking up, particularly in the snow-vulnerable Northeast.
While construction statistics are improving, it is still too early for aluminum producers to feel the impact, although Hamilton said he is hopeful that they will begin to do so in the next 12 to 18 months.
OCarroll predicts that aluminum shipments to the construction market will rise 3.6 percent to 204 million pounds this year and 4.4 percent to 213 million pounds in 2013.
General engineering, which includes a wide array of miscellaneous manufacturing applications, tends to follow gross domestic product growth and, therefore, has been relatively flat. Harvey said that it also has been adversely affected by outsourcing of manufacturing jobs to Asia and Latin America. Now that we are seeing a little bit of reshoring of manufacturing, there has been a little bit of a rebirth, but it has been a very slow recovery, he said, although he is hopeful there will be improvement next year as the U.S. economy improves.
We are looking forward to some resolution in Europe, the end of the U.S. elections and more economic recovery, Harvey said, noting that in the meantime, distributorsÑwhich account for about 25 percent of all aluminum industry shipmentsÑwill remain conservative.
Sales agreed, noting that most service centers are striving to manage inventories better, and while they are currently in balance with about 2.8 months supply on hand, distributors likely will work down their stocks further through the end of the year. Whether there will be the usual restocking in January will depend on business activity, he said, but he is optimistic that the slow, steady recovery of the U.S. aluminum market will continue. Every year since the downturn, it has been better than the previous year. I believe that will continue, and that 2013 will be better than 2012.