The end of aluminum 9-year surplus

Aluminum , Commodities , Metals Apr 13, 2014 No Comments

AluminumA broad look at the aluminum market shows that it’s not just this past year that the metal has performed poorly — it’s been down in the dumps for nearly a decade. As Bloomberg notes, “there have been nine years of excess global production … with Chinese output tripling in the period.”

All that doom and gloom makes this week’s news that in 2014 the metal may go into deficit that much more significant.

2013 wasn’t a great year for aluminum. During the first nine months of the year, production of the metal exceeded demand by 1.2 million metric tons (MT), The Wall Street Journal quotes the World Bureau of Metal Statistics as saying. That’s more than double the surplus recorded during the previous year.

Unsurprisingly, prices for the metal were hit hard by that oversupply. Specifically, states the news outlet, as the year drew to a close, three-month aluminum on the London Metal Exchange (LME) was down at $1,748 per MT, its lowest point since July 2009.

But Alcoa forecasts global aluminum demand will exceed production this year, predicting an end to an almost decade-long surplus driven by Chinese output that has saddled the industry with lower prices.

Alcoa is among aluminum producers outside of China to have shuttered unprofitable smelters amid a glut of the lightweight metal. The New York-based company yesterday reported better-than-expected first quarter earnings and said it now sees a global supply deficit of 730,000 metric tons. In January it had predicted a 106,000-ton surplus.

Aluminum prices have certainly gained some support from Alcoa’s new outlook. Most recently, Bloomberg pegged LME aluminum for three-month delivery at $1,827 per MT, above the $1,700 to $1,800 range it traded in for 2014’s first quarter.

The aluminum industry expects the automotive sector will generate the biggest wave of new demand since manufacturers started using the lightweight metal to make beverage cans.

According to The New York Times, the shift to aluminum is gaining momentum and the demand from automakers for the metal is soaring, “expecting to reach one billion pounds this year, up from 200 million in 2012, and to grow by more than 30% annually through 2020.” The heavier the truck, the more lightweighting that can be achieved with the switch to aluminum.

Not surprisingly, Ford announced in January that it would make the body of its new F-150 primarily out of aluminum. As a result, steelmakers face an uncertain future. This has allowed Ford to shed over 700 pounds from the truck compared to the 2014 model. Reduced weight will result in significantly improved gas mileage as the automaker tries to stay ahead of the ever-tightening CAFE (corporate average fuel economy) standards.

The gas mileage of the F150 has a huge impact on Ford’s CAFE rating because F-Series has been the best-selling vehicle in the United States for the last 32 years in a row. Last year Ford sold over 760,000 F-Series trucks. This means Ford must improve the F150’s gas mileage if it wants to avoid violating CAFE standards. The 2014 CAFE requirement for trucks dictates an EPA window sticker rating of 18 mpg. This number increases by nearly 30% over the next decade to 23 mpg.

“For us, it’s equivalent to the invention of the (aluminum) can which was introduced to many markets about 50 years ago,” said Aluminum Association of Canada president Jean Simard Friday. Simard called the move a “game-changer,” prompting competitor General Motors to become less reliant on heavier steel for some of its models.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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