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2014 Outlook: Aluminum

Keywords: Tags  Aluminum, Ford Motor Corp., Charles Bradford, Bradford Research Inc., International Aluminum Institute, Alcoa Inc., London Metal Exchange, John Tumazos Very Independent Research


The aluminum market should see increased demand in 2014 thanks to heightened demand from mass-produced vehicles such as Ford Motor Co.’s aluminum-intensive F-150 pickup truck.

But while some metal analysts predict that better growth in downstream markets as diverse as transportation and construction should bolster aluminum prices and premiums, others believe that a modest increase in North American demand alone won’t be enough to soak up a global aluminum supply glut.

“The big issue is all the new capacity coming on at the same time that you have a relatively slow world economy,” Charles Bradford, president of New York-based Bradford Research Inc., said. “It’s always been the issue: How much supply vs. how much demand?”

Global primary aluminum capacity is expected to top 28.8 million tonnes this year, a 3.7-percent increase from about 27.8 million tonnes in 2013 and up 9.4 percent from 26.3 million tonnes in 2012, according to International Aluminium Institute data.

The gains come in part as a result of big expansions in the Middle East, including Pittsburgh-based aluminum producer Alcoa Inc.’s joint-venture smelter with Saudi Arabian Mining Co. (Ma’aden), which is expected to reach an operating capacity of 740,000 tonnes per year in 2014, and Emirates Aluminium Co. Ltd. also increasing capacity, Bradford said. “You have more growth in capacity than you have growth in demand.”

Also weighing on the market are swollen inventories at London Metal Exchange-listed warehouses, John Tumazos, principal of Holmdel, N.J.-based John Tumazos Very Independent Research LLC, said. “These inventories are like gaining weight. Once you put them on, it’s hard to get rid of them.”

LME aluminum inventories are around 5.44 million tonnes, off from a record 6 million tonnes in late July 2013 but well above the 400,000- to 500,000-tonne levels seen during the 2004-08 commodity “super-cycle,” Tumazos said. Given that even boom times didn’t see a true deficit, an argument could be made that inventories from 1994—built on turmoil in the Russian economy following the collapse of the former Soviet Union—“never got erased,” he said. “I think it is cavalier to assume that 6 million tonnes of inventory clears out easily.”

Other factors dragging on aluminum are a strong dollar, big purchases by China’s State Reserve Bureau—which don’t show up in LME warehouse data—and output in China rising faster than production cuts in the rest of the world, Tumazos said. As a result, aluminum prices are lower and the Midwest premium has come off 2 to 3 cents from its peak, putting alumina- and ingot-smelting margins under pressure. Very Independent Research forecasts LME aluminum prices of 88 cents per pound ($1,940 per tonne) this year vs. an average of 83 to 84 cents per pound ($1,830 to $1,852 per tonne) in 2013.

“It’s moving in the wrong direction on us,” Tumazos said. “The outlook for (2014) is for a continued slow squeeze. ... Prices have fallen a great deal. Premiums will fall more.”

But other analysts predict that downstream demand gains, particularly in the aerospace and automotive markets, should give support to prices and premiums.

The next model year of Dearborn, Mich.-based Ford’s F-150 pickup truck, for example, will sport an aluminum body when it goes into production in 2014, said Lloyd O’Carroll, principal at O’Carroll Aluminum Bulletin. “You are talking about a very large quantity of incremental demand for that,” he said. “And then there are a whole series of other models that will be converting in the next few years.”

North American aluminum shipments are expected to jump 4 percent to 24.2 billion pounds in 2014, thanks largely to a fast-growing transportation market that is expected to see demand increase 10.3 percent to 8.3 billion pounds, Timothy Hayes, principal of New York-based Lawrence Capital Management Inc., said. “Auto is one of the key drivers of that. It’s a combination of a cyclical recovery in vehicle production along with the substitution of aluminum for steel, specifically in auto body sheet.”

The construction market also is expected to see strong growth in 2014, with North American aluminum shipments possibly jumping 5 percent to roughly 2.5 billion pounds, Hayes said. “That market seemed to hit a lull in 2013, which I think surprised a lot of people.” But the lull should end in 2014, he said, as the housing market resumes its recovery at the same time that nonresidential construction activity improves.

But one big aluminum-consuming market that isn’t facing such bright prospects is packaging—everything from aluminum foil to beverage cans—where shipments may slide 1 percent to 4.6 billion pounds in 2014. “We’re just not drinking as much beer and soda as we used to,” Hayes said, noting that health-conscious consumers are drinking less soda while beer aficionados are switching to microbrews, a market dominated by glass.

Hayes brushed aside concerns expressed by other analysts and market participants about regional premiums falling dramatically in response to new, more-stringent LME warehouse rules. “Part—but not all—of the rise in premiums makes sense because the U.S. is going as far as the (Persian) Gulf to get metal now, whereas 5 to 10 years ago that wasn’t the case,” he said. “If you go back far enough—to the early ’90s—North America actually had a surplus of metal and the premium was 1 to 2 cents per pound. We didn’t import any of it. That’s why the premium was so cheap.”


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