CRU Aluminum: Mid-Year Demand Report Card

First, this month’s report on inflation showed a drop month-on-month (MoM) and may signal that the interest rate hikes and (albeit slowly) falling energy prices are starting to have a favorable impact. The updated news of improving Industrial Production (IP) also is a positive point as three months of declining IP again turned positive. Controlling inflation will not only give a boost to disposable income but will also lift overall consumer sentiment.

The just released housing market data was less cheery as both single family home permits and starts declined, -4.3% and -10.1% respectively. While this news is not startling given rising mortgage rates and higher prices, the rate of deceleration is notable. This decline is not yet seen in aluminum building product shipments of sheet and extrusions where shipments are +7.3% year-on-year (YoY).

Flat rolled products remain in demand through mid-year. While building product applications may be cooling down, packaging, automotive and defense related sheet and plate demand is steady. Through the first half of 2022, overall sheet and plate demand is up 7%. Automakers, frustrated by supply chain delays in H1, are looking for strong H2 2022 production rates, especially as the semiconductor chip shortage is projected to ease in the fourth quarter. Aluminum plate, .500” and heavier, will remain on allocation as semiconductor tooling and defense applications consume domestic production. Packaging demand still defies gravity through mid-year, up 13% YoY, despite some signs of softening on higher beverage prices working through the supply chain.

Even in a mixed bag of demand signals, conversion fees remain firm as the 2023 contract negotiations begin in earnest. Service centers, often harbingers of demand forecasts, have pulled strong from their mill suppliers through June, +11.8% YoY, but noting that most of that surge was in Q1 versus Q2. Despite that easing, it is unlikely that the metal service channel will refuse any volume in 2023, given the supply headaches of 2021 and 2022. With a positive demand forecast, albeit mixed across markets, conversion fees are not likely going lower into the new contract year.  

Extrusion markets slowing entering H2 2022

The Aluminum Association H1 2022 data has been released for new extrusion orders and shipments to end use segments. The report shows that extrusion shipments were lower by 1% quarter-on-quarter, with both construction and transportation segments lower by 1% in Q2 2022 as compared with Q1 2022. Through six months of shipment data, North American extruders remain positive, +3.1% YoY, despite the Q2 2022 softening.

While demand destruction is likely starting to seep in and could explain the downturn, it is not the only part of the story. At the beginning of the year, lead times were extended to 40+ weeks and supply was the largest concern. This led to end users trying to secure as much metal as possible. Now that the demand panic has subsided from the Covid-19 starved supply chain, OEMs have started to hit the pause button. The summer lull is providing an opportunity to reassess real demand before ramping up again heading into H2.

As of now, extrusion producers are showing appropriate concern but have yet to report any large demand destruction. Rather, this lull has provided a window for production to improve on-time delivery performance and bring in lead times to more manageable levels. Demand is also starting to become more diverse. Aerospace has seen increased build rates for both commercial airplanes and other applications for cargo and private aircraft. Defense spending has increased, and the light-weighting of electric vehicles (both cars and trucks) will be another source to buoy demand through year’s end. These factors will continue to play a large role in keeping demand steady going into 2023 to offset slowdowns in construction and durable goods.

LME remains volatile while Midwest premium bottoms

The London Metal Exchange continues to exhibit volatility heading into the middle of August. On Monday, Aug. 15, the price closed down $100 per metric ton from the $2,515/metric ton mark we reported late last week and is hovering near $2,415/metric ton this week, yet opened lower at $2,390/metric ton as the week closed on Aug. 19.

The fear of sustained global demand destruction is heightened when considering global geopolitical influences on the LME. China, the largest consumer of aluminum, has been flirting with recession-like numbers for months and the latest news sustains a pessimistic view and accounts for the $100 LME slide. While interest rates are rising in the US, the Peoples Bank of China just announced they will be lowering rates to help spur China’s economy. Retail sales, fixed asset investments, construction starts, and other industrial indexes have all declined in China throughout August.

Europe also has been fighting high inflation and energy issues. This month, consumer prices rose 8.9% YoY which was expected to dampen overall GDP growth in the region, however the actual report came in above expectations. Germany had a weaker month, but growth returned in France while also strengthening in both Spain and Italy. Tourism and the return to air travel has been a much-welcomed boost to Europe and a renewed level of air travel will spur investment for both Airbus and Boeing.

These global economic trends lead to the volatility seen in the LME price as the economic uncertainty continues.

The Midwest premium has followed its own path as the summer lull has brought a calm to the market. The premium is currently sitting just under $0.28 per pound, where it has been through the month of August. Spot demand is still present, but trading volumes are light. Freight has continued to come off peak demand and Russian metal is still flowing which has eased the panic buying that drove the premium higher in Q2 2022. On lower demand and less volume, the Midwest premium has retraced to its current mark near $0.28/lb.

Inflation Reduction Act (IRA) boosts aluminum’s prominence in US electrification strategy

President Joe Biden signed a $750 billion piece of legislation into law on Aug. 16, 2022, and while the headline captures the attention of inflation-weary consumers, the impact on the aluminum industry is seismic. Embedded in the IRA are tax credits, grants and direct funding for programs that will provide lift to both aluminum supply and demand.

Driven by the strategic need to reduce dependency on foreign oil and foreign critical materials, at the heart of the IRA are efforts to create a secure national supply chain. Whether that is a supply chain for energy, and energy’s direct impact on US aluminum production, or for EVs and EV batteries, the IRA provides the funding for energy production and energy transmission on a never-before-seen scale. The bill will also directly support the adoption of EVs and the electrification of mid-size to large trucks, commercial and federal fleet trucks and buses which are large consumers of gasoline and diesel and emitters of carbon given the number of hours they operate and the number of miles they travel. The US Postal Service (USPS) is one of the first targets for conversion and the subsequent savings that will come with the electrification of the 300,000 federal postal vehicles.

Upstream in the aluminum value chain, the Defense Production Act may be tapped to secure lower energy prices for idled US smelters. The re-development of US smelters is back on the table and seen as a vital link in the supply chain to secure critical industries (aluminum and thereto autos and aerospace) and defense infrastructure. Aluminum semis, in every form, figure to see new demand from electric transmission investment and increased production of EVs and EV batteries while meeting the threshold for the requisite origin-of-production requirements. US manufacturers and free trade partners will benefit from these incentives while foreign entities of concern will be excluded from participation.

The US Internal Revenue Service has yet to take on the task of developing the new tax code to support the accounting for the $750 billion. The new law extends current EV tax credits, set to expire in December 2022, now through 2032—ample runway for industry and consumers to embrace the opportunities supported by the new legislation. Now, in conjunction with last week’s Chips and Science Act, the US looks to secure critical supply chains proven vulnerable during the Covid-19 pandemic, the war in Ukraine, and other global geopolitical tensions.

By Steve Williamson, Research Manager, CRU Group