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COMMENT: Is aluminum ready for opportunities and challenges?

Keywords: Tags  John Ambrosia

It’s good to be king, they say. But short of that, it’s not too bad being in the aluminum business right now.

As a number of articles in this month’s issue attest, alumina suppliers, mills, service centers and others in the industry are facing opportunities for greater profits as well as developments in new manufacturing processes and new ways of ordering pricing for raw materials.

Just two years ago you couldn’t say the same. The economy was dragging down all the sectors that aluminum products rely on, there was overcapacity—creating an oversupply of product—and earnings were not matching previous years.

But starting in 2010, and continuing into this year, the environment changed dramatically. Now companies are in much better shape, and everyone is cautiously, or even joyously, optimistic about the near-term. Consider the following:

• What was up until summer 2010 an oversupply of material has turned into a balance.

• The automobile industry has rebounded and demand has been increasing.

• Worldwide aluminum growth is projected to continue through the year, building on gains late last year.

• Demand is up in the double digits over 2009 and 2010.

• Profits for many aluminum producers are healthy this year, after several bad quarters in 2008, 2009 and 2010.

• Not only the U.S. economy but also overall global manufacturing appears to be heading up for the near- and long-term.

The opportunities are many. The thinning and lightweighting of aluminum will help producers capture more of the sustainability marketplace, which should help drive demand and profits for some time to come. Being ready to serve growing demand in more traditional products also can improve the bottom line.

To be sure, there are still a number of challenges all along the chain of production, distribution and sales. For example, aluminum producers are not the only ones interested in capturing the lighter, greener marketplace, and steel in particular poses a constant competitor. So manufacturers will have to invest in new technologies and processes and be willing to think differently to grab and retain an advantage there.

The overall economy is still not completely out of the woods, so careful and forward-thinking business practices still need to be adhered to. Those companies that wisely cover the approaching terrain—rough as it may be from time to time—will survive to reach the fabled land of higher capacity, increased output and greater profits.

Still to be worked out is how alumina producers’ desire to move customers to an indexed pricing mechanism will turn out. Buyers of the key aluminum input continue to bristle at the prospect of such a change.

As Anne Riley points out on page 30, big producers are pushing for deals on an indexed basis, but they can’t find consumers that readily and enthusiastically embrace it. The new system—which sets alumina prices based on an index rather than as a percentage of London Metal Exchange aluminum—was brewing as an idea for some time, but alumina producers only began to actively encourage a switch to the new method in the past year.

Alcoa Inc. has transferred about 20 percent of its alumina volumes over to the new system. It plans on moving the remainder of customers to an index basis in as little as five years, the company told AMM. Keep an eye on this project, as alumina indexing is sure to be one of those challenges that occasionally set off fireworks. The potential for missteps is still great, as is the possibility of reward.

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A speaker at the Institute of Scrap Recycling Industries (ISRI) annual convention in Los Angeles said that while he felt assured that scrapyards and mills had appropriate radiation detection equipment on site, he still needed to be reassured that such equipment was in good operating condition.

The aftermath of the Japan disaster was on many minds at the ISRI convention. Most people first and foremost were concerned about the wellbeing of the Japanese people and the struggles they still face. This was universally the first reaction when the subject was broached, and it speaks to a basic decency in the hearts of people in the industry.

But sentiment does not easily become sentimentality in the business world, and at some point realistic issues need to be considered and addressed. The radiation question is a crucial one, and the disquiet about the condition of U.S. safety equipment is reasonable. Yards and mills in all metal sectors need to do what they can now to ensure that they will be able to deal with the potential issues raised by irradiated scrap finding its way into the stream.

Beyond this, exporters are bracing for what they hope will be increased demand from China, South Korea and other Asian scrap buyers who may have to turn to the United States to replace the scrap they normally would receive from Japan. Steelmakers, aluminum producers and others also are looking to a long-term market in which they can help supply the finished products Japan will need to rebuild. Again, those best prepared for opportunity will be the ones to best take advantage of it.

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