09-30-2020, 08:48 AM
he aluminum industry has been suffering from overcapacity for the past two years, depressing prices and pushing producers to search for survival strategies, such as exploring new markets and innovating in specialty product categories.
As with many industrial market trends today, the overcapacity problem stems from China's rapid economic expansion. According to London-based research firm CRU, China now has an installed aluminum production capacity of 28 million tons and is producing at a rate of 24 million tons per year.
The Chinese government has been making some efforts to pull back production. However, Diana Kinch, a reporter for Dow Jones, wrote recently in The Wall Street Journal that, on net, the efforts are not reducing capacity because of contradictory incentives: "[China] continues to build new smelter capacity in Xinjiang in the country's northwest, where abundant coal makes energy cheaper than in other provinces and some new smelters gain tax incentives."
As such, the pressure to cut capacity has fallen on aluminum producers in competing economies. U.S. aluminum company Alcoa and Russian producer Rusal are both planning capacity cuts totaling 1 million tons to reduce global inventories and prop up prices. CRU estimates global inventories right now at 12 million tons, but warns that the industry needs to close 3 million tons of smelter capacity "to solve the immediate oversupply problem."
CRU analysts told Kinch that the problem should eventually come under control, but not soon. According to consultant Ling Wong, "[China's] share of global aluminum production will continue to rise, from about 46 percent now to over 50 percent by the end of the decade, when it could reach 42 million tons, which is quite scary. After that, capacity will stabilize."
IMT asked representatives of the Arlington, Va.-based Aluminum Association what its members -- which includes aluminum producers and producers of fabricated products -- see as their most promising strategies for navigating these troubled waters. Communications Director Matt Meenan responded that his organization believes "the fundamentals of the aluminum industry in North America are sound" and that its member companies "are well-positioned to capture future growth opportunities."
Meenan said that demand for and consumption of aluminum "have grown nearly 30 percent since reaching lows in 2009" and are heading back to pre-recession levels. Advancements in the transportation sector pushed North American demand up 6 percent from 2011 to 2012.
Alcoa also takes a positive view of its aluminum prospects. In his April 8 presentation, CEO and chairman Klaus Kleinfeld told investors that the company is strong, saying, "All segments are profitable. Net income is the best net income since the third quarter of '11," with earnings up 16 percent sequentially. He said he expects aluminum demand to grow 7 percent for 2013 and touted his company's improved performance "despite year-on-year lower metal prices."
The second-quarter shareholder report was less rosy, revealing a $45 million profit loss. Still, the company posted $76 million in earnings and $5.85 billion in revenue. Alcoa also boasted $539 million in what it called "productivity savings" for the first half of 2013, which is more than two-thirds of its $750 million annual target.
Research firm IBISWorld, based in Melbourne, Australia, says that the global aluminum industry shrank from 2008 to 2013 at a compound annual growth rate (CAGR) of -5.3 percent. However, the company predicts that this trend will reverse, moving to a positive 3.2 percent CAGR from 2013 to 2018. IBISWorld expects the price of the metal to rise from $1,964 per metric ton in 2013 to $2,304 per metric ton in 2018.
Meanwhile, industry insiders are saying that the real opportunities for innovative companies in aluminum are not in commodity production but in more specialized value-add markets.
Meenan of The Aluminum Association told IMT that progress in the automotive sector is good news for the industry. Automotive has seen "40 years of uninterrupted growth in aluminum use," and "aluminum use in autos is expected to double by 2025 as consumers demand more fuel efficient vehicles."
In his April presentation, Alcoa's Kleinfeld said he sees continued growth in all of Alcoa's global end markets, including aerospace, automotive, truck and trailer, packaging, construction, and gas turbines. The company's value-add businesses, he said, are "driving 71 percent of segment profits."
Possibly the most exciting segment for Alcoa is aerospace, which accounts for $3.8 billion in annual company revenue. Kleinfeld predicts that Alcoa's aerospace revenues will grow at a rate of 11.6 percent from 2012 to 2015. He told his shareholder audience that the company is very well positioned in this value-add segment. "More than 90 percent of all aluminum aerospace alloys have been developed by Alcoa," he said. "Every western commercial aircraft flying today uses Alcoa fasteners, and every western commercial and military aircraft engine uses Alcoa castings."
But the company has further opportunities in aerospace, Kleinfeld insisted, especially considering the drive toward light-weighting of aircraft. Citing an example of how innovation can help Alcoa increase its value-add businesses, he told the audience that company metallurgists have developed an aluminum-lithium combination that is lighter and stronger.
"Therefore, it very much supports the goal of 20 percent fuel efficiency improvement. It has improved corrosion and fatigue properties that allow the inspection interval to be doubled, so it reduces the inspection costs," he said. Kleinfeld expects the company's aluminum-lithium revenues to quadruple by 2020.
As with many industrial market trends today, the overcapacity problem stems from China's rapid economic expansion. According to London-based research firm CRU, China now has an installed aluminum production capacity of 28 million tons and is producing at a rate of 24 million tons per year.
The Chinese government has been making some efforts to pull back production. However, Diana Kinch, a reporter for Dow Jones, wrote recently in The Wall Street Journal that, on net, the efforts are not reducing capacity because of contradictory incentives: "[China] continues to build new smelter capacity in Xinjiang in the country's northwest, where abundant coal makes energy cheaper than in other provinces and some new smelters gain tax incentives."
As such, the pressure to cut capacity has fallen on aluminum producers in competing economies. U.S. aluminum company Alcoa and Russian producer Rusal are both planning capacity cuts totaling 1 million tons to reduce global inventories and prop up prices. CRU estimates global inventories right now at 12 million tons, but warns that the industry needs to close 3 million tons of smelter capacity "to solve the immediate oversupply problem."
CRU analysts told Kinch that the problem should eventually come under control, but not soon. According to consultant Ling Wong, "[China's] share of global aluminum production will continue to rise, from about 46 percent now to over 50 percent by the end of the decade, when it could reach 42 million tons, which is quite scary. After that, capacity will stabilize."
IMT asked representatives of the Arlington, Va.-based Aluminum Association what its members -- which includes aluminum producers and producers of fabricated products -- see as their most promising strategies for navigating these troubled waters. Communications Director Matt Meenan responded that his organization believes "the fundamentals of the aluminum industry in North America are sound" and that its member companies "are well-positioned to capture future growth opportunities."
Meenan said that demand for and consumption of aluminum "have grown nearly 30 percent since reaching lows in 2009" and are heading back to pre-recession levels. Advancements in the transportation sector pushed North American demand up 6 percent from 2011 to 2012.
Alcoa also takes a positive view of its aluminum prospects. In his April 8 presentation, CEO and chairman Klaus Kleinfeld told investors that the company is strong, saying, "All segments are profitable. Net income is the best net income since the third quarter of '11," with earnings up 16 percent sequentially. He said he expects aluminum demand to grow 7 percent for 2013 and touted his company's improved performance "despite year-on-year lower metal prices."
The second-quarter shareholder report was less rosy, revealing a $45 million profit loss. Still, the company posted $76 million in earnings and $5.85 billion in revenue. Alcoa also boasted $539 million in what it called "productivity savings" for the first half of 2013, which is more than two-thirds of its $750 million annual target.
Research firm IBISWorld, based in Melbourne, Australia, says that the global aluminum industry shrank from 2008 to 2013 at a compound annual growth rate (CAGR) of -5.3 percent. However, the company predicts that this trend will reverse, moving to a positive 3.2 percent CAGR from 2013 to 2018. IBISWorld expects the price of the metal to rise from $1,964 per metric ton in 2013 to $2,304 per metric ton in 2018.
Meanwhile, industry insiders are saying that the real opportunities for innovative companies in aluminum are not in commodity production but in more specialized value-add markets.
Meenan of The Aluminum Association told IMT that progress in the automotive sector is good news for the industry. Automotive has seen "40 years of uninterrupted growth in aluminum use," and "aluminum use in autos is expected to double by 2025 as consumers demand more fuel efficient vehicles."
In his April presentation, Alcoa's Kleinfeld said he sees continued growth in all of Alcoa's global end markets, including aerospace, automotive, truck and trailer, packaging, construction, and gas turbines. The company's value-add businesses, he said, are "driving 71 percent of segment profits."
Possibly the most exciting segment for Alcoa is aerospace, which accounts for $3.8 billion in annual company revenue. Kleinfeld predicts that Alcoa's aerospace revenues will grow at a rate of 11.6 percent from 2012 to 2015. He told his shareholder audience that the company is very well positioned in this value-add segment. "More than 90 percent of all aluminum aerospace alloys have been developed by Alcoa," he said. "Every western commercial aircraft flying today uses Alcoa fasteners, and every western commercial and military aircraft engine uses Alcoa castings."
But the company has further opportunities in aerospace, Kleinfeld insisted, especially considering the drive toward light-weighting of aircraft. Citing an example of how innovation can help Alcoa increase its value-add businesses, he told the audience that company metallurgists have developed an aluminum-lithium combination that is lighter and stronger.
"Therefore, it very much supports the goal of 20 percent fuel efficiency improvement. It has improved corrosion and fatigue properties that allow the inspection interval to be doubled, so it reduces the inspection costs," he said. Kleinfeld expects the company's aluminum-lithium revenues to quadruple by 2020.