Aluminum Market Outlook: All's Quiet On the Nonferrous Front

Aluminum mills and distributors face an uncertain outlook for 2009 as the worldwide financial crisis threatens to filter down to industrial manufacturing.Alexin Forges Ahead with Billet Plant An uncomfortable quiet has settled over the aluminum industry. Plummeting prices, downtrodden end-use markets and the uncertainty surrounding the overall domestic economy have created a period of general inactivity throughout the nonferrous world. Descriptions of the market range from bad to worse."Things were going along very nicely up until early August and then it got very quiet, and the climate continues to be quiet," says one aluminum distributor from the Northeast describing business activity. "It will be a while before we come out of this thing," says Jeff Knapton, vice president of marketing for aluminum extrusion manufacturer Indalex, Lincolnshire, Ill. "It’s affecting everyone. It doesn’t matter if you’re a distributor or an extruder."Buddy Stemple, vice president of specialty products for Novelis, Atlanta, says flatly, "I can’t give you one optimistic thing that’s happening in any of our markets."Not every member of the sector is that bearish, but rosy outlooks are in short supply. Even service centers that have thus far eluded the slowdown are proceeding cautiously."We keep hearing the sky is falling. We’ve got our umbrellas out, but nobody’s got them open yet," says Bill Sales, senior vice president for nonferrous operations at Reliance Steel & Aluminum Co., Los Angeles. "Our business levels are holding up fairly well. But the outlook for 2009 is pretty cloudy right now. We’re planning for the worst and hoping for the best."Reliance is not a big player in two of the worst performing metals markets, residential construction and automotive, which gives the company some immunity to the slowdown, Sales notes. "We’re not in some of the markets that have been negatively impacted. But we don’t have our heads in the sand thinking there aren’t people going through tough times."Moreover, those end markets trending negative aren’t expected to reverse course anytime soon.Industry projections for the North American light truck and automotive build, initially forecast at up to 13 million, have been lowered by some analysts to 11.9 million. That’s a decline of more than 25 percent from the 16 million produced just two years earlier.September’s Davenport Quarterly Aluminum Outlook, prepared by Davenport & Co. Senior Vice President of Research Lloyd O’Carroll, has revised projections for the transportation market downward, forecasting a 10 percent decline in 2008, the worst year for auto production since the 1981-82 recession. O’Carroll does, however, expect production to stabilize in 2009.Construction represents another major end-use market for aluminum, and the outlook is similarly bleak.O’Carroll believes aluminum shipments to the construction market will be down 8.3 percent in 2008 and fall another 11.3 percent in 2009. He attributes the precipitous drop to continuing slowness in the housing market and the inevitable dip in non-residential construction that lags weak homebuilding."There’s no sign of life in the housing market at all," says Stemple.Even the aluminum can market is not immune to some softening, Stemple notes, and O’Carroll’s data backs him up. The total number of aluminum cans produced is projected to drop 0.7 percent in 2008 and another 0.9 percent in 2009. The growing consumer preference for plastic-bottled energy drinks and water over carbonated soft drinks is behind the projected decline.Aluminum’s flat-rolled sector has been showing the most signs of weakness. Alcoa officials, for example, had been expecting some softness, but instead experienced a $26 million profitability decline during the quarter."We had anticipated a seasonal decline in the segment, but since then the markets in the U.S. and Europe have deteriorated," Alcoa President and CEO Klaus Kleinfeld said during the company’s quarterly conference call. "Automotive, commercial transportation, building and construction and distribution all declined, so seasonal weakness was exacerbated by weaker end markets."Alcoa was not alone. During its presentation to analysts, Alcoa noted that its three primary competitors had all suffered similar margin squeezes during the first three quarters of 2008."Everyone in the sector struggled with significant input cost increases in the first half of the year," said Chuck McLane, executive vice president and chief financial officer for Alcoa.McLane pointed to increases of 88 percent for caustic coke, 110 percent for calcined coke, 47 percent for natural gas and 77 percent for fuel oil as negative contributors. "The higher aluminum prices in 2008 were more than offset by increases to energy, raw material costs and the U.S. dollar."But the price escalation experienced in the first half of the year is history. And the rapidly falling price in September is likely responsible for the declining shipments to service centers, as distributors are wary of getting caught with high-priced inventory during a period of declining prices.According to the Davenport outlook, the LME aluminum cash price dropped approximately 25 percent to $2,500 per metric ton from its mid-July peak of $3,300 per ton. As a result of the steep decline, the analysts revised price predictions for 2009 to an average of $2,515 per ton, well below its original forecast of $3,100 per ton."Our cut in the price outlook is due to surpluses in 2008 and 2009 that are likely to be larger than we last predicted," O’Carroll writes. He believes the market should see a surplus of 800,000 tons in 2009, a jump from the previous estimate of 275,000 tons.Noting the difficulty in pinpointing price movements, O’Carroll writes that the price may bottom in the first quarter of 2009. That news would be welcomed by the service center sector.Aluminum shipments to service centers were down 3.7 percent in September, according to the latest Metals Activity Report from the Metals Service Center Institute, Rolling Meadows, Ill. But inventories were a little higher than a year ago, suggesting that the inactivity in the market may continue."Culturally, we always focus on getting our inventory at its lowest point by year’s end. But with the overall economy a question mark, combined with the decrease in metals’ prices, we’re putting some extra focus on inventory and making sure we get it down," says Reliance’s Sales. "And from what we’re seeing and hearing in the market, we’re not the only ones doing that. We’re probably going to see as an industry a new low level of inventory."The cautious buying is not limited to service center operators. End-use customers are also showing more trepidation at taking on material."What we’re seeing is a customer who might have given us a $1,200 order to cover what he needed for the month, but now he’s giving us four $300 orders. It’s hand-to-mouth buying. Everybody’s recognizing that you should only get what you need because the price you get two weeks from now might be a littler lower," Sales says.Casting a shadow over the entire industry is the distressed financial market. While the credit crunch and related financial issues have not affected the industrial manufacturing sector much thus far, that’s expected to change. "It’s been interesting throughout the year reading all the negativity in the media about how bad things are in the economy," Sales says. "But it was more of the financial side. Industrial manufacturing has been good."Stemple agrees that manufacturing was able to stay above the nation’s credit problems for much of the year, though that’s not likely to continue. "About 60 days ago, I would have said my outlook for next year would be more of the same from 2008. Now I don’t have that level of optimism. I don’t think the world understands how interconnected this stuff is. If you don’t have money, you can’t spend money. It’s that simple," Stemple says. To get through the difficulties, both aluminum producers and service centers are paying careful attention to all aspects of their operations."We work so hard on managing margins right now," says David Pace, chief operating officer and executive vice president of Industrial Metal Supply Co., San Diego, Calif. "Your salespeople always get mixed messages. We need to have a lot of clarity with our inside and outside sales teams as to what we need.""You look at things with a more critical eye at times like this," says Indalex’s Knapton. "We made some hard decisions late last year and early this year so we can ride this out. And we’re really focusing on the fundamentals, like lean principles, to streamline what we have."Another must in a market like this, Knapton says, is to capture market share, which helps grow the business or at least mitigate its erosion. Alternative energy markets offer new potential for aluminum extrusion sales, he adds, while his company is also trying to make inroads in the distribution market.In the otherwise shrinking automotive market, aluminum continues to make gains in market share as automakers strive to design lighter, more fuel-efficient vehicles. Aluminum usage should rise to 346 pounds per vehicle in 2009, a sharp increase from the 295 pounds per vehicle just five years earlier, O’Carroll says.For the industry’s leading trade group, the emphasis is on selling the material’s sustainability and its importance in the growing global climate change debate. "We are spending a lot of time on sustainable development. We regard that as our sweet spot," says Steve Larkin, president of the Aluminum Association, Arlington, Va. "Not just in terms of being recyclable or reducing the overall call on energy and reducing our carbon footprint, but also that the products we use create a better way of life around the world."For the time being, the aluminum makers and distributors would settle for a better way of life in North America. But many are having a hard time envisioning it.O’Carroll forecasts that domestic aluminum shipments will enjoy a modest increase in 2009, though he acknowledges that the economy is at risk of going into recession."There’s more doom and gloom. Even if the credit market gets fixed, it will be a while before we come out of this," says Knapton, who doesn’t expect any recovery before 2010. He sees reason for excitement for those who are able to ride out the rough patch."Whoever is standing at the end will reap the benefits," Knapton says. "There will be a significant opportunity to rocket out of this thing." Alexin Forges Aheadwith Billet PlantIn a perfect world, the management team behind Alexin LLC would have picked a different time to launch its new aluminum billet manufacturing facility.The Bluffton, Ind.-based facility was expected to begin operations in late October, ramping up production through the start of 2009."The market’s not so great," acknowledges Neil Johnson, vice president of sales and material. "But there’s enough excitement in our logistical advantage over our competitors that our trial order status is pretty good."Alexin, led by aluminum extrusion veteran Tom Horter who serves as company president, expects to produce 3 million pounds of billet in November, increase to 4 million in December and be ready to grow to 5 1/2 million pounds by Jan. 1. "We’re anticipating that people will be using up the high-priced inventory they purchased over the last few months, and starting the new year they’ll be looking for metal. By then we should be qualified with a good number of customers," Johnson says.The billet supplier believes its proximity to a bevy of aluminum extruders will differentiate it in the marketplace. The company is targeting customers with extrusion presses running 6000 series material. "Bluffton is at the heart of the extrusion market," he says. "Within 240 miles we have 97 presses with aluminum extrusion needs."Johnson says most of those 97 presses can be reached with deliveries in a day, while many of them can be reached two or three times in a single day."Back in the ‘70s and ‘80s, a lot of these extrusion companies had to build their own cast houses. A number of them built wall-to-wall cast houses because they couldn’t get security of supply," Johnson says. "They were using too much of their problem-solving capacity dealing with their metal buys, a host of environmental issues and market issues. They were trying to be focused on two different businesses. It hurt a number of those extruders and it’s helped us to realize we need to build this plant. We want to be their cast house."The company has installed most of the equipment at the site, which includes a 100,000-square-foot manufacturing operation and a 200,000-square-foot storage facility. Johnson says the company could conceivably have opened a few weeks earlier than its Oct. 31 launch date, though it used the time to provide additional training to its workforce of more than 50.The company will provide diameters starting at 7 to 10 inches, while also providing 14- and 16-inch diameter billet to service the growing number of larger presses being constructed in the Midwest."We situated the plant for their needs," Johnson says. "We want to be there when they start those presses up, when they start supplying rod and bar and other finished product for the service centers."One of those newer, nearby presses belongs to Indalex, Lincolnshire, Ill. Indalex has undergone a $25 million expansion of its operation in Connersville, Ind., with the installation of a 6,000-ton UBE press that will increase production capacity by 47 million pounds. "We’re expanding our capabilities into product offerings that our customers need, larger bars, larger rods," says Jeff Knapton, vice president of marketing for Indalex. "It hits all of our strategic markets."Knapton isn’t worried about the timing of the expansion, noting that Indalex has historically expanded operations during downturns.Similarly, Alexin officials recognize that the short-term outlook for aluminum extruders, and the entire metals industry, is not the healthiest. But as far as Johnson knows, the extruders his company is targeting in the Midwest are not in trouble."It is more difficult because people are trying to work off high-priced inventories. I don’t think anybody has the order book they’re excited about."At the same time, there is some benefit to the timing of the launch."It does allow people the time to sample our product. They’re not so busy they can’t take time out to run a trial," he says.Moreover, whatever downturn the aluminum extrusion sector is experiencing figures to be temporary. The company believes in the long-term prospects of the industry."We’re investing $58 million in the aluminum extrusion industry," Johnson says. "We think it’s a good shot in the

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