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Supply response lags demand shock for US aluminium

May 05, 2020 | 08:00 PM |

US Midwest aluminium premiums have slumped in reaction to the ramifications of the spread of Covid-19. Myra Pinkham surveys the market damage and analysts’ forecasts

The US aluminium market has been hit hard by the novel coronavirus (Covid-19) pandemic and is expected to remain challenged for much of this year. The extent of the impact will depend upon factors including how long it will take for demand from the major end-use markets to recover and what the mills’ supply response will be. It is not that the US aluminium market had been all that stellar over the last few years, John Mothersole, director of research for IHS Markit, pointed out, “but now it is terrible.”

Preliminary estimates by the Aluminum Association indicate that combined US and Canadian aluminium shipments were down by about 3% year on year. Matt Meenan, a spokesman for the association, said that while that marked the first year-on-year decline in a decade, domestic aluminium shipments remained historically high as it followed two consecutive years of record shipment levels.

Yang Cao, senior analyst for Fastmarkets MB, said there was actually a 2.0% year-on-year rise in US apparent aluminium consumption last year. But, especially given that it came at a time when there was a contraction of aluminium consumption globally, Mothersole described it as a “dead cat bounce” making up for the sharp US inventory correction in 2018.

Meenan noted that North American aluminium shipments continued to weaken in January, falling to a level was down by about 9% from a year earlier. However, Sergey Donskoy, a metals and mining analyst for Société Générale, said that at that time it was expected that US aluminium apparent demand would either stabilize or pick up slightly in 2020. “But that hasn’t happened, especially with the US automotive industry on lockdown,” he said.

Geordie Wilkes, head of research for Sucden Financial, agreed, pointing out that the US aluminium market is largely skewed to the automotive market, with US aluminium auto sheet use being more intensive than in many other areas of the world.

“The problem is that Covid-19 has spread so quickly and has damaged demand so significantly,” Wilkes said, with both the manufacturing purchasing managers’ index (PMI) and new orders falling at a faster pace than they had for at least ten years. Not only did the Institute for Supply Management’s manufacturing PMI fall back into negative territory to 49.1% in March, from 50.1% in February, but ISM’s new orders index tumbled for the second consecutive month to 42.2% after peaking at 52.0% in January. The February new orders index was 49.8%.

GDP to fall

While it is too early to say for sure, Michael Haigh, head of commodity research for Société Générale, anticipated that US GDP will decline by 2-6% this year, compared with about a 1.6-3% decline globally.

This came as over 22 million new US unemployment claims were filed in just four weeks through mid-April, US retail sales fell a record 8.7% month on month in March – more than double the November 2008 decline at the beginning of the ‘Great Recession’ – and March US industrial production fell 5.4% month on month (including a 28% decline in the production of autos and auto parts), which was its biggest drop since 1946, when the US demobilized after World War II.

Haigh, however, is classifying the current situation as a deep recession, not an economic depression, because he does not expect the US economy to stay that depressed for that long with the fiscal and monetary measures and virus containment efforts being put into place.

Cao said this will likely have a chain effect upon aluminium demand. As of mid-April, Fastmarkets MB was forecasting that US aluminium demand could decline by 3.3% year-on-year in 2020. “Even if the Covid-19 pandemic gets under control, we believe that US aluminium demand will remain under pressure for at least the first half of the year,” he explained.

“It is tricky to say what will happen going forward because we don’t know how long demand will continue to fall,” Wilkes said, calling it a very volatile situation. He said that it largely depends on the US government’s ability to get the Covid-19 pandemic under control. “With plans being made for the US to come out of lockdown sooner than expected, this could support aluminium demand, however there is a risk to the economy, as the virus is not under control in many areas,” he pointed out.

Haigh said that he believes the aluminium recovery is likely to be U-shaped, with different US states recovering at different points of time, much as is the case for different countries throughout the world. There is also likely to be some variation by major end-use market, although Wilkes said that overall OEMs have been operating hand to mouth – only buying metal when they absolutely need to and not committing to longer term contracts as they had done previously, which he said is understandable given increased unemployment. “Even when the US economy begins to recover it is very likely that consumers will continue to delay purchases of big ticket items.”

Transportation troubled

Currently aluminium demand from the transportation sector has been particularly hard hit, which is not surprising with US auto assembly plants stopping operations in mid-March and not expected to ramp up their operations until early May at the very earliest. That, Wilkes said, has been having a big impact upon US aluminium rolling mills and extruders that have significant automotive exposure.

But on top of that, Mothersole pointed out that aerospace demand, which had been robust in 2019 and was originally expected to remain so through 2021, went into a tailspin, first with Boeing halting production of its troubled 737 MAX aircraft in January, and more recently suspending operations in Pennsylvania and Washington state because of the recent collapse in commercial air travel.

Nevertheless, Cao said that US airlines and airframe producers will probably get some support from the $2 trillion Coronavirus Aid, Relief, And Economic Security (CARES) Act economic rescue package. Still, Mothersole said he doubts that commercial air traffic, especially international travel, will return to anywhere near its pre-pandemic level before 2022.

Mothersole is, however, more optimistic about aluminium demand from the auto market, with the idling of US auto plants being just temporary. Once production resumes, Mothersole said that – given its advantage in the lightweighting of vehicles, which has, and continues to be the goal of automakers – he expects that aluminium could continue to gain a market share in cars and light trucks produced in North America.

Christopher Plummer, managing director of Metal Strategies Inc, said the aluminium sheet content per average light vehicle increased to 145 lbs (65.8 kg) in 2020, up from an average of only 16 lbs in 2010. The Center of Automotive Research’s 2019 Technology Roadmap for Materials and Manufacturing forecast that overall average aluminium content per vehicle would double from 13% in 2020 to 26% in 2040, including a tripling of the use of higher-strength 7000-series aluminium.

Mothersole admitted that it is, however, possible that such an increase in aluminium content could be blunted should a recently announced rollback by the Trump administration of the stringent Obama-era greenhouse gas emissions and fuel efficiency regulations remain in effect. The more immediate impact upon aluminium demand, however, will be when consumer demand for automobiles and other durable goods begins to pick up again.

Even with President Trump pushing to reopen the US economy, it will likely be a while before many people return to work. “Because of that, it will be a gradual process before things get back to any kind of normality,” Société Générale’s Donskoy said, adding that while he cannot say for sure, he doubts that there will be a normalization of automotive demand before the end of this year at the earliest.

Construction crippled

Aluminium use by the US construction sector has also been adversely impacted, Mothersole said, partly because of a number of construction “cease and desist” orders issued in various locales, and even some states, restricting non-essential construction in the name of worker safety. In fact, 55% of the respondents to an early-April Associated General Contractors of America (AGC) survey said that one or more of their construction projects were delayed, halted or cancelled, with 26% saying they have done so due to governmental orders. In fact, US housing starts fell by 22.3% month on month in March, according to the latest data from the US Housing and Urban Development and Commerce Department data, despite what Mothersole described as “incredibly low” interest rates.

Packaging has fared better than other end-use markets, Wilkes said, given that consumers have been stockpiling food and beverages during the pandemic. On the other hand, Mothersole pointed out that demand from such institutional markets as restaurants, hotels, entertainment and catering services has largely evaporated. Nevertheless, Wilkes said that some aluminium can sheet and foil plants have been looking to expand their production.

Supply-side impacts

Given that it is somewhat easier for social distancing rules to be met in mines and smelters than in some downstream operations, Donskoy said it is likely that there will be more aluminium disruptions on the demand side than the supply side.

That has been the case so far – not just in the US, but globally. However, Cao said that given the recent sharp decline in aluminium prices, which will bring further financial pressure to aluminium producers, more production cuts are a distinct possibility. He pointed out that the US Midwest premium dropped to a 25-month low of 10-12 cents per lb in mid-April on the back of virus uncertainty. “We believe there is further downside risk as panicked sellers could force the premium lower while demand continues to get battered.”

In fact, Haigh said that with aluminium and other commodity prices at unsustainably low levels, such cuts are necessary to prevent bankruptcies at higher cost operations. Mothersole agreed, maintaining that it will be a very long haul, stretching out about six to eight quarters, for aluminium prices to recover without an aggressive supply response, but while there have already been a lot of cuts in other metal industries both in the US and elsewhere in the world, including steel and various types of mining operations, that has not been the case for primary aluminium.

Donskoy said that it is not all that surprising that the industry’s supply response is lagging the demand shock. That is also partly because it is tricky for smelters to switch off potlines. “Also, they are expensive to restart and switching off an aluminum smelter could be a very complicated issue, even for the power grid itself,” Donskoy said, given the amount of power they consume. He said that is one reason why some smelters were spared from shutting down, including some in South Africa.

“But the industry can’t produce at levels where their aluminium just goes into inventory,” he added. Smelters at the top end of the cost curve, particularly where their power costs are high, are naturally at risk in current market conditions.

The greatest supply response to date in the US, however, has been further downstream, Wilkes said, particularly from rolling mills and extruders that have significant automotive exposure. He said he expects to see further scaling down of production, or even capacity suspensions.

Already Novelis has announced that it was idling capacity at both its Oswego, New York, and Kingston, Ontario, plants, each of which have annual capacities of about 400,000 tonnes. Also, Aleris Corp, which was recently acquired by Novelis, has extended the idling of its 200,000 tonnes per year mill in Lewisport, Kentucky, and Arconic Corp has announced that it was indefinitely idling both its Tennessee and Massena, New York, facilities. Constellium SE also announced that it would temporarily reduce or suspend activities at certain of its manufacturing sites due to Covid-19 disruptions.

Mothersole said there is a need for about 1 million tonnes of production capacity cuts to be made globally, with much of the industry outside of China, including the US, which has erected a tariff wall, expressing hopes that China does not continue to support its industry as it has been doing so to date.

Meanwhile, in early March, the Aluminum Association filed an antidumping and countervailing duty petition charging that unfairly traded imports of common alloy aluminium sheet from 18 countries – Bahrain, Brazil, Croatia, Egypt, Germany, Greece, India, Indonesia, Italy, Oman, Romania, Serbia, Slovenia, South Africa, South Korea, Spain, Taiwan and Turkey – are causing material injury to the US. This came 13 months after a similar case against Chinese imports.

All told, Mothersole said that 2020 will be a year that will be remembered as a year actually to forget for the US aluminium market. While he is expecting to see some level of recovery in 2021, he warned that recovery will likely to be start and stop in nature.

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