The level of uncertainty
shrouding aluminum markets heading into the new year was
unprecedented, with some analysts prepared to make two price
forecastsÑone if the fiscal cliff issue was resolved,
and one if it wasnt.
President Obama and Congress
managed to avoid falling off the cliff, but analysts say that
while the political resolution should provide some clarity and
confidence to markets that will help aluminum demand and
pricesÑBarclays Capital Plc has forecast that the London
Metal Exchange aluminum cash contract will average $2,315 per
tonne this year, while Davenport & Co. LLC is similarly
forecasting a cash price of $2,300 per tonne--there are still
issues on the table, such as spending and the debt ceiling,
that could hinder the markets further down the line.
Fundamentals softened up
(in the fourth quarter). They weakened more than we
figured, Davenport analyst Tim Hayes told AMM.
We havent run different scenarios, but certainly if
the ... U.S. economy goes into a recession, obviously aluminum
prices will be lower. A recession would cause a sizable cut to
our aluminum forecast.
David Gagliano, director of U.S.
metals and mining research for Barclays, said that a number of
things have to happen for LME aluminum to hit $2,315 per
The aluminum price doesnt
have much further to fall from its current range before
producers will cut more production; three-month aluminum prices
ended the year far below the 2012 high of $2,349 per tonne in
late February and below many global smelters breakeven
points. A number of global aluminum producers--including Alcoa
Inc., Norsk Hydro ASA, Rio Tinto Alcan and United Co.
RusalÑcurtailed production last year, although the cuts
have had little impact on prices. And considering how much
capacity China continues to bring online, any additional
production taken offline this year will be more than offset by
additional Chinese capacity, Hayes said. We know
Chinas (net) production went up last year compared to
2011 because they keep adding new capacity thats more
than offsetting any curtailments.
China produced 21 million tonnes
of aluminum in 2012, up from 19.7 million tonnes in 2011,
according to Davenport. Increasing Chinese consumption could
help prices, but many sources argue that oversupply continues
to plague the industry, and unless more capacity comes offline,
aluminum prices will suffer.
Global consumption of
aluminum has grown an average of 6.5 percent each year for the
past 10 years, yet the price has stayed (fairly
consistent), Gagliano said. The problem has been,
and will continue to be, with supply. Weve had surpluses
for the past five consecutive years.
John Tumazos of Very Independent
Research LLC, Holmdel, N.J., agreed. China is growing,
but not as fast. And the Chinese are expanding production when
demand is slower, he said. U.S. and European output
doesnt matter. The issue is whether the Chinese expand
five, 10 or 15 percent. They are 45 percent of world output,
and no one thinks (demand) will grow by 10 or 12 percent (in
Warehouses are another piece of
the aluminum markets puzzle. Inventories reached record
highs toward the end of 2012, with global warehouses holding
5.21 million tonnes at the end of December.
I think you have to be
worried (about the price) when there are consecutive weeks of
record exchange inventories and most regions in the world
appear to be slowing, said Tumazos, who expects the
average aluminum price to hover around $1,984 per tonne this
The warehousing industry is
lucrative for traders, who profit from financing material as
long as a contango remains in effect. The phenomenon has pushed
Midwest premiums to record highs, and most anticipate the trend
to continue this year.
Although there have been some
rumblings that Hong Kong Exchanges & Clearing Ltd., which
recently acquired the LME, might change load-out rate rules,
few expect any actual changes. Lets say they change
the load-out rates to 1,500 tonnes per day per warehouse in
Detroit. Not per location, but per warehouse. Where are they
going to find the trucks? one trader said. It
wont happen unless you want to take trucks from the
Southwest and leave the produce down there. They cannot
physically do it.
Although consumers have
complained about the warehousing situation, traders argue that
the warehouses are propping up the aluminum price at the
moment; if material currently stored in warehouses suddenly
flooded markets, prices would plummet and smelters would shut
Sources are reasonably
optimistic about demand for specific end markets, including
aerospace and automotive, which continue to be bright spots.
Sources also anticipate a pickup in building and construction,
particularly on the East Coast in the wake of Hurricane
Pittsburgh-based Alcoa estimates
that aerospace manufacturers Airbus ASA and Boeing Co. each
have an eight-year order backlog, and Foothill Ranch,
Calif.-based Kaiser Aluminum Corp. forecasts that the backlog
will increase every year until 2020, creating an effect
throughout the supply chain, with service centers reporting
mill lead times of up to five months for 2000- and 7000-series
Increased aerospace demand could
impact other alloy production as well. In theory, if aerospace
demand stays on course, mills would produce more 2000- and
7000-series aerospace plate and as a result produce less
A shortage of 6000-series plate,
which is used in a variety of end markets, could occur in 2013,
although service centers said it hasnt happened yet.
We expected (a 6000-series) shortage by now. But it
hasnt happened, which indicates a couple of things:
Theres a lot more 6000-series capacity (and) there is a
lot more aerospace plate capacity. And even though theres
been a good level of demand for aircraft builders, it
hasnt been at a level that dries up capacity, one
service center source said. With more capacity, you need
a bigger demand level to trigger it. That demand level is out
there, no question. Its just a matter of when it will
A second service center source
said that a true domestic shortage of 6000-series plate is not
likely as consumers will simply turn to imports.
However, if mills do not adjust
their product mix and continue to produce 6000-series plate,
mills run the risk of creating oversupply, a third service
center source said. Demand will be flat (for 6000-series
plate). And if anything happens (in the economy) that will go
down, in which case there will be too much. We already have
plenty of 6000.
The automotive sector--a major
end market for aluminum--is much more susceptible to consumer
confidence. Should the markets tank, consumers will stop making
large purchases, including vehicles. If the U.S. goes
into a recession and Europe continues to get worse, then you
could see automotive demand decline, Hayes said.
However, market players maintain
that two factors--substitutions for steel and replacing older
fleets--will support auto aluminum growth in 2013. Davenport
has forecast that auto sales will increase 5 percent this year
vs. 2012, and, provided aluminum takes a bigger share, auto
demand could increase by 9 to 10 percent in 2013.
While many automotive growth
forecasts are long-termÑestimates are that vehicles will
carry an average of 550 pounds of aluminum by 2025, up from 343
pounds todayÑa number of automakers have already begun
to shift toward the lightweight metal in their
Dearborn, Mich.-based Ford Motor
Co. reportedly is planning to use a predominantly aluminum body
for its new F-150 pickup truck, while Chrysler Group LLC,
Auburn Hills, Mich., and General Motors Co., Detroit, likely
will follow suit in their own trucks.
Building and construction is
another area that showed signs of life as 2012 came to a close,
particularly in the wake of Hurricane Sandy. Both Davenport and
Barclays are forecasting upticks in building and construction
this year, with Davenport predicting a 5-percent increase in
2013 compared with a 4-percent increase in 2012.
In our little domain of
Hurricane Sandy, rebuilding is kicking up. I personally think
things are looking really good, a second trader said.
A consumer agreed, noting that on top of decent demand from
aerospace, automotive, and building and construction, consumer
spending is up--always a positive sign. I think the first
quarter looks strong, he said.