CRU Aluminum: Seasonal Reporting Winds Turn Colder

The Industrial Production (IP) forecast, not nearly as bleak, is trending lower from the previous June forecast, from 5.41% to 4.19% for the balance of 2022. For 2023, the IP forecast remains positive, albeit less optimistic compared to June’s view. It is now 0.61%, down from the 1.84% earlier consensus for growth in H2 2023 following a difficult Q1.

Earnings Wrap

Alcoa posted a loss of $746 million, the majority of which was a charge of $626 million to meet pension obligations. Higher costs for energy and raw materials contributed to the loss as did a drop of 17% in the realized aluminum price. To deleverage its exposure to high energy prices in Europe, Alcoa is curtailing a portion of its primary metal production in the region and shifting focus to primary output at the Alumar smelter (Brazil) and the Portland smelter (Australia), with capacity ramp ups by Q1 2023 and Q4 2024, respectively.

Kaiser Aluminum also posted results through nine months and while net income showed improvements YTD and y/y. The results were impacted by supply chain disruptions and rising costs. Most notable was the lifting of the force majeure status caused by magnesium supply to the Warrick, Ind., mill. With new magnesium suppliers qualified and in place, the company expects a return to full operational status in Q4 2022 – notwithstanding the inflationary headwinds. Kaiser has been able to deliver y/y value-added revenue gains in each of its core markets (aerospace, packaging, general engineering applications, and automotive extrusions) through nine months, totalling $1.1 billion through the first nine months of the year

Kaiser Aluminum posted a $3 million net profit in contrast with a year-ago loss of $2 million. Sales revenue changed little at $749 million versus $751 million, with shipments down 10.5% to 282 million pounds (128,000 tons). But the average realized price rose to $2.66 per pound from $2.38 per pound.

Gränges, an international rolling business based in Sweden, is counting on its US operations to provide stable demand during the next quarter. In Europe, where the company faces the challenges of both increasing costs and falling demand, the energy and near-term demand picture is bleak.

Efforts to offset the downward pressure on revenues includes both productivity initiatives and price increases to pass the cost burden through the value chain. Because that will take time, the more reliable demand picture for the North American operations are expected to fortify results in the near term. Gränges Americas experienced continued strong demand from HVAC and specialty packaging customers in Q3 and sees a similar outlook for Q4.

As for the state of demand in Europe, Gränges expects end-customer demand to be stable in automotive but depressed in all other end-use sectors. The company also forecasts sales to be further dampened by continued high downstream inventory levels. Net profit increased by 1.9% y/y to $13.9 million, lifted by sales revenue which was 33.6% higher through Q3 2022. That trend was driven by a higher average fabrication price and the increased aluminium price.

LME Inventories Bolstered by Recent Deliveries

The LME maintained its nervous posture this week as a large inflow of aluminum stocks were delivered to warehouses in Port Klang and Singapore. So far since the start of October, a total of 264,500 metric tons of aluminum have been delivered into the LME network of warehouses, taking total LME stocks back to 562,550 metric tons – the highest LME stocks have been in five months.

There has been a lot of market speculation suggesting that part of these deliveries was Russian metal coming in ahead of the LME’s consideration of a ban on future Russian deliveries into the exchange. The LME is yet to make a final decision on the matter because it is keen first on getting market feedback. That feedback will be submitted until end of the month.

For the week, the LME will close near the $2,220 per metric ton but has found no real directional footing because market news changes regularly. Earlier reports about an impending Biden administration sanction on Rusal metal, and the considered delisting of the Russian brand by LME, have stirred the markets. But they have yet to produce any bankable action to drive the LME higher or lower. Next week’s LME Week conversations may bring some insight into possible actionable policy moves either by governments or by market authorities.

Meanwhile, the US Midwest P1020 premium continued to drop. It was down to 19.5–20 cents per pound when last assessed. The US Midwest premium continued to ride market sentiment downward, with no support to be found. Trading volumes have picked up recently. But according to the commitment of trader reports for the CME, there has yet to be any significant long interest building.

Without support, it is likely the premium falls further. Freight rates continue to come off, with ocean rates falling another 5–9% to both the East and West coasts. Trucking rates have not been down as sharply. And gas prices have started to trend up slightly, so this will test the trend in the coming weeks because the Midwest Premium is a proxy for the basket of costs (freight, warehousing, and insurance) to bring aluminum to market in North America from global LME stocks.

As indicated at the top of this aluminum report, the forward view of underlying demand for aluminum products is laced with negative sentiment. Yet, as we poll producers, shipments and forward conversion fee indicators remain upbeat even if they indicate a slower pace of growth than experienced in 2021 and H1 2022. The weeks ahead, with a mid-term election, a war that rages in eastern Europe, and a less certain energy market will challenge producers, consumers and CRU’s GDP and IP forecasts.

By Stephen Williamson, stephen.williamson@crugroup.com