CRU Aluminum: LME, Midwest Premium Up On Brighter News

With the new year having just started, the physical market remained quiet last week and metal consumers still have low visibility over 2023 Q1. Nevertheless, the higher LME price and higher regional premiums suggest renewed optimism about lower inflation and a potential rapid recovery in the Chinese economy. This buoyancy is being noted in other regional markets. The Rotterdam duty-unpaid and duty-paid premiums were both assessed higher last week at $195–205/t and 260–280/t, respectively.

In the last few weeks China has moved rapidly away from its zero-Covid policy of repressing the virus with lockdowns, isolation, and frequent testing. In the short term, this relaxation has led to a surge in infections, which will disrupt the economy probably through 2023 Q1. In the longer term, it provides an opportunity for re-establishing higher rates of growth. In the US and Europe, several signals are suggesting that inflation may have peaked, but the risk remains especially in Europe where the war in Ukraine and the energy crisis are far from over.

December Inflation Report Brings Good News

As a follow-up to the recent announcement by the Federal Reserve of St. Louis, the December inflation report was very positive. Inflation in key markets was down significantly, signaling the worst could be over. In their statement the Fed also mentioned they are looking at a core inflation that removes shelter and consumer goods prices, as those are anomalies caused by the housing market shortage of 2022 and the Covid-19 related shortages, respectively. Labor market data also remained positive as the unemployment rate hit the lowest point it has been in 50 years, and wage growth has tempered. This positive news sparked optimism that interest rate hikes will slow, and the economy overall is in a healthier state.

Extrusion Demand Soft in 2022 H2

After the ups and downs of the pre- and post-pandemic economy, the dust is beginning to settle. Extrusion shipment volumes were starting to cool in Q3, and as Q4 data is finalized it is clear this trend has continued. In November, total extruded product shipments as reported by the Aluminum Association were down just over 9% year on year (y/y) and 8% month on month (m/m). This has brought total year-to-date (YTD) volumes for 2022 just about even with 2021, and could fall slightly below after December data comes through. 2021 often is credited as creating unfair comparisons due to the frantic post-pandemic pace. However, total YTD volumes as reported to the Aluminum Association are still well below 2019 figures as well.

Using YTD data through Q3, extrusion shipments are down close to 4% when compared to 2019, the last “normal” year. The loss in volume is spread out across all end-uses, but the two largest, B&C and transportation, were most affected. Much has been made of supply chain disruptions and the chip shortage stunting domestic auto production. However, extrusion shipments for passenger cars and light trucks applications were up 4.37% over the 2019 base year. This is a sign of the higher aluminum intensity in modern vehicles as build rates have not fully recovered. Most of the loss in volume has been related to truck trailer and semis, down over 10%. Overall shipments to transportation end-uses are still down 8.5% in total.

Building and construction has fared better than transportation, but is still -4.8% from the 2019 base year. The housing market had been strong, making residential construction a reliable area of growth. Doors and windows for single and multifamily homes are the largest segment of B&C extrusion applications, and grew 6.6% over these last two years. This equates to an extra 9 million pounds of shipments. Nonresidential construction has struggled, with doors and windows falling 16%, and storefronts down 30%. Other B&C shipments as denoted by Aluminum Association data have yet to recover fully, and are currently 14.5% below 2019 base levels. Distributors are also worth noting, with shipments up less than 1%. Service center shipments are a reliable barometer for nearby demand and the flat performance is indicative of demand as the market transitions from 2022 to 2023.

By Matthew Abrams, Matthew.Abrams@CRUGroup.Com