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Opportunities still shine in somewhat hazy environment

Dec 21, 2016 | 04:24 PM | Fastmarkets AMM staff

The view from many in the aluminum sector is that despite sluggish global demand growth, a first-half price rally will prevent market tightening.

As has been the case for some time, the aerospace and automotive sectors continue to dominate the worldviews of aluminum makers and their executives. The opportunities in these markets have allowed leaders in the aluminum sector to remain hopeful.

“We remain very confident, I mean we knock on wood, things can happen,” Jack Hockema, CEO and chairman, Kaiser Aluminum Corp., said during a 2016 earnings call. “But with everything we know right now, we feel really good about the aerospace business, and we feel really good about the automotive business.”

The view from many in the aluminum sector as 2016 wound down is that despite sluggish global demand growth, a first-half price rally encouraging production restarts will prevent more substantial tightening during the first half of 2017, although the global aluminum market is slowly tightening, although at a reduced pace.

The global primary aluminum market is forecast to remain oversupplied through the rest of the decade, moving from a surplus of 955,000 tonnes in 2017 to a deficit of 688,000 tonnes by 2020. However, demand growth will be tepid, largely due to China.

“We still remain extremely confident that over the next several years, we’re going to see a 5 percent compound annual growth rate in our content for vehicles,” Hockema said. “And again, I think it’s important to put into context here, over the past two years we’ve had more than 70 percent sales growth in automotive extrusions. So from our standpoint, this frankly (has) given our operation a chance to really assimilate all of this increased production that we have gone through the operations and is showing up in enhanced efficiency on our operations.”

The other sector aluminum makers are bullish on is aerospace, although they do have some reservations.

“Let me start by saying that it’s highly speculative in our view as to whether the downturn is coming because we certainly do not expect a downturn,” Hockema said. “The backlog is at an all-time high, it’s 9.5 years, and you look at the last cycle, it was a 3- to 5-year backlog. And most of that backlog is really solid. We don’t think very much, of it maybe 15 percent or 10 to 20 percent at most, would go away in a severe global downturn.

“So we think the backlog is strong and the backlog supports the build rates and our customers we know, they’ve been very public about it, they believe that as well. However, that said, we realized we’re in cyclic businesses and a big part of our business model as we’ve been telling everyone for more than the decade here is we managed for the downturn. So it’s something we discuss with our board every quarter,” he said.

“Looking longer term we anticipate that the aerospace supply chain inventory overhang will be largely addressed in 2017 with supply demand equilibrium restored in 2018,” Hockema said. “We recently updated our industry demand outlook for our aerospace and high strength served market applications and anticipate that 2019 demand will be up approximately 15 percent from 2016 driven by increasing single aisle and Airbus twin aisle build rates partially offset by declining build rates for the 747 A380 and the transitioning 777.”

Over at Alcoa, Klaus Kleinfeld, who served as chairman and chief executive officer of the parent company and now holds that position for Arconic, Inc., tends to agree.

“2016 in the aerospace market is clearly a transition year,” he said during a 2016 earnings call. “And the first half, if you look at large commercial aircraft deliveries, they have been down by 1 percent. At the same time, if you calculate the full year, we believe that it’s going to be flat to plus 1 percent. And we do see that there is now a very careful ramp-up of new models increasing problems we’ve particularly seen on some of the new technology and more on the jet engine side have been solved, and the orders are coming in. However, the lower orders are there for legacy models.”

“So, I think that you could not -- you cannot draw conclusions from the past. This is a very, very different and a bit odd year because of the enormous amount of innovation that’s going on,” Kleinfeld said. “And the innovation actually is the foundation why there is such a strong demand. I mean when you see the new jet engines getting 15 percent – on average, 15 percent of efficiency improvement, that’s something.”

Kleinfeld also pointed to what he calls the “aluminization of the North American auto platform” adding that “this is not just, which is very often understood, it is not just about the fully aluminum intense vehicle; we also have to look at the closures components.”

“And the light truck share now has reached 60 percent,” he said. “That is obviously also very important for us in regards to aluminum density. But we do also see going forward, when you look at vehicles that are over 12 years old, they are adding up to a 104 million vehicles out of 258 million that are in operation.

“So, there is a probably some pent up demand in there. We also do see the inventories are stable at 66 days, that’s kind of in the target range; incentives are up but so are prices.”

Although there is some room for optimism among leaders in the aluminum sector, the current and short-term views of markets is not as rosy as executives had hoped for in 2016.

“It goes without saying we’re seeing mixed signals out there. This is one reason we believe why the LME price appears to be trading within a range,” Mike Bless, president and CEO, Century Aluminum Co., said. “(The) most significant factor by far continues to be the excess supply in China.”