CRU Aluminum: Hitting the Pause Button on Aluminum Can Growth

The company reported a loss of $174 million while taking a non-cash asset impairment for its Russian operations, which it had previously stated it would suspend future investment in and would pursue a sale.

Earnings per share were $0.82 for the period versus $0.86 for Q2 2021. Year-to-date, the company reported earnings of $503 million compared to $673 million for the same period in 2021.

The most disconcerting news coming out of the earnings release and call were signs that can short-term demand was faltering.

North American can volumes were down due to what the company described as retail beverage customers pushback against higher retail prices. Fillers have pushed prices up each of the past four quarters an average of 7%. Year-on-year increases are approaching an aggregate of 30%. That’s killing discretionary demand and volume.

Ball was succinct in the earnings call: “This is 100% our customers putting up price in advance of inflation and their volume is zero, and we are impacted by zero growth.”

It warned that volume would be further subject to customer response to price in the second half. Early guidance on Q3 volume was that demand was flat to a slight increase predicated on July shipments.

Alcohol volume was down 3%, driven by domestic beer down 5%. Hard seltzer volume fell 20%, ready-to-drink cocktails rose 60%, qualified by being off a low base line number. Imported beer was up double digits while craft beers fell 3%.

Non-alcohol was up 1% with carbonated soft drinks (CSD) flat to up 1%, energy drinks were strong at up 8%, while sparkling water fell 5%

The company has decided to permanently close its Phoenix, Ariz., and St. Paul, Minn., can plants in response. These plants had can body capacity of 1.54 and 1.22 billion cans per year, respectively. To put that into better context, these plants consumed about 83 million pounds of aluminum can sheet per year. Both plants were old, circa 1969 to mid-1970s.

Ball anticipates that these two closures will remove about $60 million in fixed costs when they close later this year and early in 2023.

Concurrently, Ball has slowed construction of its new North Las Vegas can plant, describing it as a “rephasing of the start-up” that may push the plant out six to nine months. This was a $290 million investment scheduled to commence production late in 2022.

Notwithstanding the closure of the two plants, Ball believes it will have plenty of installed capacity ready when growth resumes, citing its ramp-ups of the new Pittston, Pa., and Glendale, Ariz., plants, which have aggregate capacity of 8 billion cans per year.

It is worth noting that can-making has huge seasonal swings, and we are coming out of the peak demand cycle of summer. Can-makers build inventories starting late in Q1 and Q2 in anticipation of big retail shipments in summer. Now that we are into Q3, there is a natural deceleration in can plant run rates. Even if can demand had not “hit the wall” in Q2, Ball would have been pulling back on the throttle anyway. The decision to close Phoenix and St. Paul is dramatic but appears to be the best way to execute seasonal inventory destocking and save those fixed costs on the older assets.

The company said it was not walking away from any business due to pricing and was booking new 2023 contracts at favorable pricing.

Ball was candid during its earning call in saying it expected North American growth to be “double digits” in 2022. It has naturally tempered those expectations given first half performance, but still believes that its global forecast of 4–6% medium- and long-term growth forecasts are intact, including for North America.

The company took special note that CSD are still seeing a steady shift from plastic to aluminum and, despite the 30% retail price hikes, with CSD managing that 1% rise in volume.

No reason to believe that short-term demand weakness jeopardizes its rolling mill investment

Some observers in the market have been skeptical all along about Ball’s commitment to the Manna Capital joint venture in the $2 billion aluminum rolling mill in Los Lunas, N.M. This is scheduled to start in 2026. There has been the suggestion this was a negotiating ploy to draw out can sheet sellers to be more competitive. We think that could not be farther from the truth.

Ball is not going to stake its reputation on some kind of “head fake,” announcing a major investment like this, only to withdraw suddenly. It appears committed to Los Lunas as a structural contribution to adding can sheet capacity in North America. While it is astute at buying offshore sheet very competitively, it would like a shorter supply chain. Los Lunas is part of that solution. The fact that Novelis and Steel Dynamics Inc. have also announced their own major mill investments only makes this an even faster reality.

While the short-term headwinds from lower can demand are hurting, Ball likes its long-term prospects and Los Lunas is an integral part of its plan for better supply surety.

By Greg Wittbecker, Advisor, CRU Group, Gregory.Wittbecker@crugroup.com

Learn more about CRU’s services at www.crugroup.com.