CRU Aluminum: Economic Challenges to Come to a Head in 2023

Financial Institutions Disagree in Their Forecasts for 2023

While year-out forecasts are never completely harmonized, this year’s forecasts coming from the largest financial institutions are a sign of just how challenging of an economic environment we will see in 2023. For example, Bank of America is forecasting a mild recession in early year. Barclays, Wells Fargo, and PNC bank are forecasting a recession mid-year, while J.P. Morgan and Deutsche Bank have a recession pegged for end of year. Morgan Stanley and Goldman Sachs forecast no recession.

The Federal Reserve has also continued to be active in their fight against inflation and will likely have another round of interest rate hikes coming. Recently, the Fed has been more positive, and continues to keep a watchful eye on both consumers and the job market. The Federal Reserve of St. Louis recently released a statement that mentioned stronger-than-anticipated GDP growth towards the end of 2022 as well as strong job market metrics. They even went as far as to mention that 2023 could be a year of disinflation as unemployment is below its long-run level and real GDP continues to grow. This positive news is a reminder that the unexpected event, and perhaps a catalyst for a stronger-than-anticipated 2023, could be the Fed nailing their inflation control policies, and the economy re-stabilizing after a hectic few years.

Downstream Effects

While overall GDP and economic growth might have been better than expected, this has not correlated with aluminum demand. As November shipment numbers for the US rolled in, shipments were down across the board. Extrusions were hit the hardest towards year end with close to a double-digit percentage drop in shipments both month over month (MoM) and year over year (YoY). More concerning, this brought year-to-date (YTD) growth to less than a 10th of a percent as the slowdown eats into beginning of the year growth trends. New orders were not much better, sitting at the lowest point over the last seven-plus years sans the Covid-19 shutdown-related recession. Sheet and plate fared better, but still took a hit down around 5% YoY and 10% MoM. The cause is likely two-fold. The first is a natural return to the seasonality of the industry after the post-pandemic demand frenzy. November and December are typically “wind-down” months. This trend was likely intensified by the lack of maintenance and downtime available to mills and extruders over the previous 18 months. Also, comparisons will be unfair YoY as last year was an anomaly with strong shipment volumes right up to year end.

This negative growth trend cannot all be attributed to those operational factors, with the second being a slowdown in raw demand. The housing market has slowed due to the increased interest rates. However, new residential housing permits and starts are inline with pre-pandemic norms. Automotive is still on the path to recovery as supply chains continue to improve, but have yet to hit previously forecasted levels. Other end-use sectors showing a notable drop in demand are consumer durables in the form of RVs and boats, which was expected, and a larger than originally expected drop in demand for aluminum cans. The latter of these has been due to price elasticity in response to fewer promotions for CSDs and higher pricing overall for alcoholic beverages.  

Other Regions Also in Demand Limbo

Other regions are also still sorting through economic uncertainties. China has started their recovery from the recent Covid-19-related outbreaks and Zero Covid shutdowns. However, this is still very much a work in progress. With their industry a key driver of construction end-use metal, all eyes will be on how fast B & C comes back in the region. Just last week there was a drop of just over 2% for the Shanghai Futures Exchange (SHFE) cash price of aluminum due to inventory volumes that exceeded the markets expectations and furthered demand concerns. Europe has also been struggling with inflation and energy costs. Despite natural gas prices regulating to pre-war in Ukraine levels, the region still is flirting with recession. A positive can be seen in India as it is in position to become the most populous country in 2023. The region has also focused on the modernization of much of their infrastructure, and will continue to attract investments. This puts India in position to be a potentially important piece of the 2023 demand picture.   

LME and Midwest Prices

London Metal Exchange prices have perhaps reacted to many of these negative outlooks and have fallen to a new six-month low around $2,250/ton. Previously, cash prices were stable in the $2,500-$2,300/ton range. However, the new year pushed it down past the lower end of that resistance level. Prices have started to recover slightly at the tail end of the first week, but still remain sub $2,300.

The new year also bumped up volatility for the Midwest premium again. The premium had been stable at around the 20-cent-per-pound mark, but there was a large contango forming on the CME. This has worked to push up the premium to $0.23-0.24 per pound in the first week of January, a $0.03-0.04 jump over 2022 year end. This upward movement comes as the demand challenges above hit producers, and freight rates have stabilized. Mid-year is still trading as high as $0.27 per pound, which means this upward trend will likely continue. It was thought that the previous levels were well below replacement and could not be sustained.   

Uncertainty has also hit the billet market as demand forecasting for extruders becomes a tougher task. This has driven some to forego on a yearly contract through the beginning of the year, and instead use spot deals to secure metal supply. While risky, the elevated levels of billet coming into the region will help, and prices continue to sit lower than last years contract price of $0.25 per pound.  

By Matthew Abrams, Research Analyst, CRU Group