NEW YORK Lean inventories and strong end markets mean aluminum service centers and mills will survive if the economy worsens and markets tank next year, Kaiser Aluminum Corp. president, chief executive officer and chairman Jack Hockema told AMM Wednesday.
"Say the fiscal cliff isnt resolved and we go into a (financial) crisis. ... For us, service centers and other mills, the impact wont be nearly as severe as it is in other recessions. This is a function of lean inventories in the total supply chain," he said.
"Inventories are so low in the whole pipeline now," Hockema said. "We wont see a 30- or 40-percent decline (like in 2008). I always worry about an economic downturn, but Im less concerned now because inventories are so lean."
In 2008, service centers held roughly 180 million pounds of rod and bar and 2.8 months of inventory on their floors. Once the financial crisis hit, service centers began frantically destocking, bringing inventories down to 90 million pounds in 2009, or 2.6 months of stock on the floor, Metals Service Center Institute (MSCI) data show.
These effects were felt throughout the supply chain.
In October, U.S. service centers held 120 million pounds of rod and bar, or around 2.2 months of inventory. Couple this with the level of service center destocking thats occurring now, and Hockema argues that service centers and mills are much better equipped to deal with a recession should markets turn sour next year.
"Theres no telling how deep the downturn might be, but the multiplier effect should be less," Hockema said.
Aerospace is an area that should weather a downturn, the Kaiser executive noted.
"I dont know where the economy is going. But in aerospace, I am extremely confident even if we do have a downturn," Hockema said. "Airlines may take a bit of a blip. It happened with (the) SARS (virus in 2003) and after 9/11. But the effects airlines feel are short term. Boeing Co. and Airbus ASA will keep their long-term growth trends."
Boeing and Airbus backlogs have recovered to 8,000 models after dropping to 7,000 models in 2009 from 7,500 models in 2008.
In the past, however, automotive demand has taken longer to come out of recession, and Hockema noted that the effects of a downturn in 2013 shouldnt be too severe on the automotive industry, given pent-up demand to replace aging vehicles.
"Im not so sure that auto can sustain a potential downturn, but I expect that any downturn will be less severe because the age of the fleet and pent-up demand will serve to cushion the decline," he said.
Substitution of aluminum for steel in vehicles should also help the sector in the long term, with forecasts estimating that the average volume of aluminum per vehicle will increase to 550 pounds by 2025 from 343 pounds today.