CHICAGO An improvement in the spread between aluminum prices and scrap tags may not be in the cards for the aluminum industry in the short term, according to Quanex Building Products Corp. executives.
The Houston-based companys Nichols Aluminum LLC subsidiary continued to face strong headwinds in the global aluminum markets as low prices on the London Metal Exchange and high scrap tags continued to hammer spreads, they said during a Sept. 4 conference call with analysts.
"While a minor improvement from near-record lows is possible in the next few quarters, a meaningful recovery in net spreads does not appear likely in the foreseeable future," Quanex chairman, president and chief executive officer William C. Griffiths said.
That prompted one analyst to ask whether Quanex might seek "strategic alternatives" for Nichols "sooner rather than later."
Operationally, Nichols is running about as well as it ever has, Griffiths said. "But clearly market conditions are very difficult, and that is definitely impacting its profitability." He said that Quanex continued to look for operational improvements at Nichols to offset "severe spread pressure."
But Griffiths balked when asked about Quanexs long-term plans for Nichols because, he said, the company is making major revisions to its budget after deciding to stop spending related to an enterprise resource planning (ERP) system and to instead allocate capital elsewhere.
"Its a little premature to comment on strategic alternatives for Nichols," Griffiths said. "I think well have a clearer view as to what the team can do internally and ... what may be happening to the aluminum market externally as we get into 2014and then well make an appropriate decision."
While spreads at Nichols are better in the third quarter compared with the same period last year, they are down 3 cents per pound sequentially, Quanex chief financial officer Brent Korb said. Nichols also is focusing on recovering lost market share, especially now that an oven at its Decatur, Ala., facility is up and running. Nichols needs to "prove to the market that we are making good painted product out of there," he said.
As for the ERP system, Korb said that Quanexs "third-party implementation partners have been notified, and by the end of September all external ERP consulting expenditures will have ceased. It is our goal to move ... back to our old systems as quickly as possible."
Quanex still hasnt decided whether it will use Nichols to target potential growth in the automotive sector, Griffiths said. To date, Quanex has not considered that option and has instead focused on growth opportunities in its traditional markets and short-term opportunities to reduce spread pressure.
"But I can assure you that we will be looking here after the budgeting process at some longer-term opportunities and at Nichols," Griffiths said.