CRU Aluminum: Sanctions Pending on Russian Metal

Meanwhile, gains on the Shanghai Futures Exchange (SHFE) were much more subdued. The cash contract first settled at $18,550 RMB per ton – up marginally from yesterday – and last traded at $18,550 RMB per ton.

The US is considering restricting imports of Russian aluminum in response to the military escalation in Ukraine. The US administration is weighing various options including an outright ban, raising tariffs, or sanctioning UC Rusal.

There is precedence for this type of action. In April 2018, the US imposed sanctions on UC Rusal, causing the LME price to rush to a high of $2,718 per ton – the highest traded price at the time since 2011. In the subsequent weeks and months, the price gradually fell, and sanctions were eventually lifted in January 2019.

These considerations follow closely on the heels of the LME’s ongoing consideration of delisting the Russian brand. Covered in an earlier SMU issue (Sep. 30. Vol 73. – Russian Aluminum delisting on LME), the LME’s quandary is equally problematic for Russian metal, and UC Rusal as the Biden Administration’s sanction in considered response to this week’s news from the war zone.

As LME Values are Bolstered by Recent News, Midwest Premium Fundamentals are Weaker

The Midwest Premium continues its drift lower towards $0.20 per lb, well off its peak in April at $0.40 per lb. Fuelled by the war in Ukraine, the transaction premium pitched higher in March and April as demand, logistics costs and supply anxiety were rampant at the end of Q2. As inflationary pressures began to worry domestic consumers and as the war dragged well into its eighth month, European aluminum demand and LME prices were steadily undercut throughout Q3, and the Midwest Premium fell back.

The Midwest Premium is a proxy value representing the bundle of services needed to bring primary aluminum to market: freight, warehousing, and insurance. The most significant piece of the equation, freight expense, has eased remarkably. The load to van and flatbed trailer ratios have improved for the supply chain.

As a sign consumer demand softened, load ratios have declined as have fuel prices. Van-load ratios are 3.5:1, and flatbed load ratios were 12.5:1 in September, both improving significantly from early 2022 wait times.

Fuel prices have come off their mid-June peak, with gasoline and diesel roughly 24% and 15% less costly than earlier this year, respectively.

More On Logistics – Transit Risks Loom Large

As reported last week, water levels on the Mississippi River remain low and are upsetting barge traffic and freight lanes for aluminum primary and secondary metal units. River levels continue to fall impacting navigation. Not since 1988 has barge traffic been this limited, and tons-per-mile productivity dramatically decreased for inland waterways.

Barge size and draft restrictions remain in place. Groundings occur sporadically and sections of rivers are closed intermittently for 12-36 hours. Rainfall forecasts for the next two weeks are not encouraging, and restrictions will likely remain in place as rainfall remains well below annual averages for this time of year.

The Biden Administration in close cooperation with labor unions and railway companies escaped with an eleventh-hour deal in mid-September. The deal still awaits full ratification, however, by the 115,000 workers covered in the tentative pact to keep US railways rolling.

Economics and time-off provisions figure heavily in the accord for the rank-and-file membership that has not seen a pay increase in three years. A strike would put 30% of US cargo shipments, by weight, at risk with an estimated daily cost of $2 billion as the repercussions of a labor stoppage would cascade widely across the US economy still recovering from Covid restrictions and just weeks before a Midterm national election. High political and economic stakes produced progress thus far.

Yet as recently as Oct. 10, the largest of the three key bargaining units, The Brotherhood of Maintenance of Way Employees Division voted to reject a five-year contract that included a 24% pay raise and $5,000 in bonuses citing that PTO and sick time rules were not adequately addressed and remain at the heart of the rank-and-file issues.

Similarly, a west coast dockworkers contract has yet to be hammered out. With both the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) promising neither strike nor lockout, negations continue for the 22,000 workers across 29 ports covered by the pending agreements.

Since July 1, and now well into the fourth month of talks since the last contract expiry, patience and nerves grow thin. While container dwell times at ports have improved steadily this year, the risk remains quite real for the aluminum ingot, billet, and coil that move through these west coast ports.

Aluminum FRP Demand is Hit or Miss Across End-Use Markets

The US Federal Reserve Bank increased interest rates five times this year. The impact on new single-family housing starts is evident. As single-family home prices peaked, and interest rates rose, some would-be buyers were cleared from the market. The 3105-building sheet demand which had followed the housing demand cycle upward has not yet displayed any sign of weakness.

Now at the crest of the demand wave, the continuous cast sheet producers remain sold out through the fourth quarter and booking their 2023 capacity at higher conversion fees.

No doubt that the Fed’s actions will slow the construction boom from the 1.6 million new start pace in 2021 to a normalized 1.4–1.5 million single-family home start expectation for the remainder of 2022 and 2023. Then, as the would-be homeowners removed from the new construction market by higher prices and interest rates turn to renovate their current homes, aluminum demand will be bolstered by the most common renovation projects at the roofline: facia, soffit, and rainware.

If there is a lag in the transition from new construction to the renovation cycle, and as seasonality returns to the market as pandemic buying behaviors subside, producers and fabricators will use the lull to build inventories or to reduce the extended lead times at the coating lines. Demand fundamentals are not at risk when the 10-year prior average for housing starts was closer to 1.1 million single-family homes per annum.

Transportation sheet and plate demand are being constrained by other supply chain issues impacting OEMs. Labor, materials, and supplies are holding back product sales to anxious and willing consumers.

The well-known semiconductor bottleneck is capping auto, light truck, and commercial truck production and hence aluminum demand. While new auto sales were 1.105 units in September and EV sales reached 6.6% in Q2, the auto industry continues to underperform expectations.

With Q4 as the last stand for improving the year’s result, ABS sheet demand will begin to improve and ramp up to support OEM production for autos, light trucks, and commercial rigs.

Trailer production, too, is constrained but holding steady production levels of 280,00–290,000 units. The 2023 order book is just opening for new trailer orders as the trailer OEMs watch for signs that inflation might clip consumer spending, which then trickles down to lower demand for trailers hauling those goods to market.

With the inflation threat looming, the backlog and pent-up demand support steady demand for trailer sidesheet into 2023 on the back of 2022 transportation sheet and plate demand which is up 5.3% year-on-year (YoY), accosting to Aluminum Association reporting.

Aerospace sheet and plate also look forward to 2023 with fewer supply chain obstacles and a backlog of orders. Both Boeing and Airbus have been unable to achieve their 2022 build rates for their most popular single-aisle aircraft. Boeing is scrambling up its growth curve but at a slower pace than planned. The production target for the 737 MAX is 47 planes per month in 2023 climbing above the current rate of 31 units per month.

The war in Ukraine is sparking renewed demand for heat treat sheet and plate, including plate for military hardware. Heat treat sheet and plate demand keep mills on allocation with demand 8.6% higher YoY and where August shipments outpaced July by 18.3%. Conditions certainly are ripe for higher conversion fees in 2023 as these supply-demand dynamics show zero downside risk.

The packaging segment seems to carry its strong performance into Q4. With domestic mill shipments 8.1% ahead YoY through August reported shipments, aluminum beverage can consumption is easing, and a wave of import can sheet coil belies the otherwise positive figures.

Earlier this year, both beer and soft drinks forecasts approached 10% but in Q4, those forecasts are throttled back towards 5-6%. Beverage brands opted for higher prices and were willing to risk volume to make this year’s revenue targets.

Now that the summer beverage consumption season is past, and in the context of 303,000 tons of sheet imports, there is likely four-to-six weeks of supply staged ahead of any resurgence of consumption. Recall that for most of 2022 and all of 2021, can makers were short can stock and ordered heavy against the ravenous demand brought on by the pandemic and the shift to at-home consumption and away from on-premise consumption.

On the downside of demand are consumer durable goods, off by 9.2% YoY. Those aluminum-intensive products exhibiting the most demand decay are recreational boats, major household appliances, and RVs.

Absent a boost from automotive sales, consumer durables demand has been zapped by the discontinuation of government stimulus packages, increased cost of borrowing, and pull-ahead buying caused by the pandemic. Vacation-hungry Americans looked to their campers and boats to fill their vacation plans in 2021 and through the first half of 2022, purchased new gear only to have the trade-in units and inflation hit the market at the same time further decelerating demand. While new boats and campers still come to market, the demand growth exhibited in 2021 and 2022 will not reoccur in 2023.

By Stephen Williamson, stephen.williamson@crugroup.com