Steel Mills

CRU Aluminum: Volatility Returns to Market

February 5, 2023

Now entering the second month of the year, prices are still a top-of-mind conversation. After its run-up to over $2,600/tonne, the London Metal Exchange calmed, and volatility dropped. This signals that, for now, it has hit resistance. The Midwest premium has followed a similar trend. After peaking just over $0.30/lb, it has started to come off just a bit, down a half cent this week. This adds weight to the theory that the Midwest retracement was due to a depressed December price correcting back up closer to replacement levels. The premium does tend to overshoot in tight markets, and this is evident in the softening in recent weeks and the backardation working its way into the CME futures curve.

Billet has proved to be perhaps the most dynamic market of 2023 so far. Late last year there were reports that more extruders than past averages were choosing to lean on the spot market to fill their metal needs. As of this week, many of the large billet producers are still reporting that a small but significant number of contracts remain open. Billet so far has the one value-added product affected the most by the recent slowdown, namely in extrusions. Another factor has been the increased competition from overseas producers as a high volume of billet came into the country from overseas, particularly from India and some Persian Gulf countries. As such, contract prices are being reported as up to $0.08 less than last year’s contracted price on the low end, with contract timing playing a large role on where each contract sits on the spectrum.

Taking that into account, the largest risk currently could be to the upside for the spot market. Should the economy catch its footing and fail to decline as much as anticipated, demand for extruded products would gain momentum as well. With more leaning on the spot market, a sudden jump in new orders could strain the supply chain. This risk is predicated on the economy avoiding a downturn, however. And this is still a big question mark going forward.

Currently, the sentiment in the physical market has been better than expected. January flat-rolled products (FRP) mill shipments are reported to be better than December. Just the number of shipping days alone made that a bankable certainty. The winter storm that shut down much of North America late in December also pushed some of December’s shipments into 2023. With the December mill FRP shipment tally in hand, the double-digit mid-year growth rates had landed at +3.6% year on year (YoY). A respectable number following 2021, which posted 11.8% YoY growth over 2020 to cap the Covid-19 recovery period, but also a clear realization that inflation, energy costs, and cautious consumers have adjusted the pace.

Extruders are also reporting a decent start to the year, particularly in three key markets. Aerospace, automotive, and defense applications have all shown signs that 2023 will be a year of growth. With air travel still booming, Boeing and Airbus recently announced growth in build rates throughout the rest of the year. In December, the latest budget was passed in Washington, and should lead to orders for military applications picking up. Light military-grade vehicles is one area set to see ample growth this year. Transportation continues to recover post-pandemic, and build rates are still suppressed. Despite that, shipments to the automotive sector actually increased, signaling the higher aluminum intensity of modern passenger vehicles and electric vehicle (EV) growth. Other small pockets of growth in transportation still exist. Recently, reports that truck trailers are being repaired at higher rates than in the past could lead to extrusion demand as they will likely need to be replaced in the process. The postal service is also set to start the replacement of its 500,000 delivery vehicles this year as part of the Inflation Reduction Act. These have high aluminum-extruded content per vehicle. Lead times for large circle size hard alloys are still extended out over a year and auto original equipment manufacturer (OEM) orders remain strong.

Housing starts, however, fell victim to the seven US Federal Reserve rate increases throughout 2022. At 1.382 million new single-family housing starts in December, demand fell lower in the always-challenging winter season. With one more 25-basis-point rate increase expected from the Fed in early February, building and construction demand will return in the spring season to meet the single-family housing shortage that still exists. It is noteworthy that while single family housing starts are lower, construction spending is higher. Attributed to more costly materials and labor, it is also indicative of the shift to multi-family housing units, and high-end single-family residences.

By Matthew Abrams, Matthew.Abrams@CRUGroup.Com