CRU Aluminum: Weak Demand Signals Set Summer Tone

US Midwest Weakens Week Over Week at $0.241- $0.246¢/lb

The US Midwest premium spot is more stable in recent times compared to the extreme fluctuations earlier in the year. It looks quite docile entering June compared to this time last year as the premium was above $0.30/lb. However, it has dropped a fraction the week ending June 9 due to current market sentiment. Shipments as reported by the Aluminum Association are down double digits year to date (YTD) vs. 2022 for extruded products, and nearing this same level for rolled products. Imports are also down heavily across the board. Right now, the only bright spots in the industry are the automotive end-use demand and hard alloy defense and aerospace applications.

Looking at the commitment of trader report from the CME, open interest has been level, but speculators have been building a long position in the market with almost zero short interest. This could suggest that despite the weakening in the short term and a backwardation on the futures curve, a demand push could bring the premium back higher. The potential for lower interest rates in 2023 H2 may provide the catalyst for a rally.

US Manufacturing Base Shrinking

It was clear back in March 2022, when the Federal Reserve began its current rate hike cycle, that rising interest rates and quantitative tightening were going to slow the US economy. The housing market, and the construction sector by extension, were quick to fall victims to higher borrowing costs, and manufacturing industries were not long behind.

Manufacturing output started flattening out since mid-2022, and while there were occasional small monthly increases, such as a 1% rise in April 2023, manufacturing output remains slightly below the pre-pandemic level, in contrast to GDP, which is 6% above the pre-pandemic level.

The ISM Purchasing Manager Index for the manufacturing sector also saw a small increase from 46.3 to 47.1 in April 2023, but in May the downward trend resumed with a reading of 46.9. In fact, the Manufacturing PMI signaled that the sector began contracting back in November 2022, and since then the index has not left recessionary territory.

May 2023 marks the seventh straight month of contraction in the Manufacturing PMI. When we break-down all five categories that make up the Manufacturing PMI, four of them came below 50-mark in May, the exception being the employment index.

The new orders index has remained in recessionary territory since September 2022, signaling weakening new demand. The new export orders index continued declining, reflecting weak global demand and a strong dollar – since despite the troubles in the banking sector and last-minute debt ceiling negotiations, the US dollar remains resilient. While a strong currency helps limit inflation for consumers, it also reduces competitiveness of US exports.

The inventories index fell below 50 in March 2023 as supply-chain bottlenecks have eased and liquidity improved. The supplier deliveries index has been below the 50 breakeven point since October 2022, signaling faster deliveries of suppliers to manufacturers. However, the fact that in May 2023 the supplier deliveries index reached the lowest level since March 2009 also clearly demonstrates slowing activity.

The prices index has been volatile, reflecting that some manufacturing industries have been doing better than others. However, the prices index came at 44.3 in May 2023, which is the lowest level since December 2022, consistent with the big fall in US PPI inflation, which is now negative year over year (y/y). The employment index has shown resilience, as hiring in the sector continues at a solid pace.

Soft FRP and Extrusion Demand With Lower Logistics Costs Invite Imports

The threat of increased imports and price erosion remains for domestic aluminum producers and consumers. While it is reasonable to conclude that the supply chain lessons learned during the pandemic rush will be long lasting, some opportunistic buying will take place to test the friend-shoring trend. Service centers, buying for nearby demand, will test this market if only to average down inventory values and stay aligned with competitors on this slippery slope.

There is good news coming out of the prolonged negotiations between the International Longshore, and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA). Both parties have recently signaled that a new collective bargaining agreement is at hand. The deal covers 22,000 workers and 70 companies, respectively, serving 29 West Coast ports. Slack demand in 2022 H2 and in 2023 Q1 has certainly taken the pressure off the ports. Still, word of an agreement will be welcome news that will support aluminum trade flows, in and out of North America.

The over-the-road loads to equipment ratios are steady through 2023 Q2. Van loads and equipment availability continued to be 2:1, and flatbed accessibility stabilized near 12:1, load to equipment ratio. This time last year, the van and flatbed load ratios were two and six times higher, respectively. Fuel prices moved lower, too, down -20% since the beginning of the year. Logistics metrics remain effective demand indicators. Any uptick in demand will find adequate transport service levels to deliver timely as lead times for rolled products and extrusions remain short. Only heat-treatable alloy plate remains on allocation as demand for aerospace, semiconductor tooling and defence applications remain immune from the economic malaise.

Learn more about CRU’s services at www.crugroup.com

By Stephen Williamson, CRU Research Manager, stephen.williamson@crugroup.com