Steel Products Prices North America

CRU Aluminum: Searching for Optimism

July 14, 2023

With demand trending lower throughout out the first half of 2023, the aluminum industry is searching for something to be optimistic about. Recent economic news is leaning positive, with inflation slowing across multiple measures including the Producer Price Index (PPI) and manufacturing final goods’ pricing. Personal consumption expenditure has slowed from its peak but sustained a healthy growth level. The US consumer savings rate has ticked back up with consumers starting to rely more and more on credit. This culminated into lower readings on the misery index and more positivity amongst consumers. Most importantly, the Federal Reserve has hinted that it will hold off on raising the federal funds rate after one last 25 basis-point hike in July.

The positivity has not been felt by the physical side of the market. This year, extruded product shipments are nearing a 10% decline year-on-year with flat-rolled products down 3%. The second half of the year was originally pegged for the start of a recovery however evidence has been building to the contrary. Most notably, service centers have been increasingly living hand to mouth before placing new mill orders, taking advantage of the shorter lead times and uncertain conditions. They now report a potential for the second half to be just as weak as the first.

Even the healthiest end-use segments will face challenges in the second half of the year. Car payments have risen to over $1,000/month for 20% of car buyers. Many worry that this could build into demand headwinds. Defense spending is sustained as the US works to replenish the war material sent to aid Ukraine. With more money being directed to essentials, the nonessential side of defense contracts has been limited.

With order volumes shrinking, and the tightness of 2022 clearly in the rearview mirror, the relationships between primary producers and those further down stream are being tested. The level of uncertainty forces those further downstream to seek contracts, which puts more stress on supply chains, particularly for extrusions. Primary producers prefer to shift away from billet and into ingot during periods of slack demand to increase operational and commercial flexibility. With less visibility on the certainty of next year’s demand, billet price risk rises as producers will either over or undershooting volumes and this greatly affects billet premiums in 2024.

Labor Issues Piling Up In 2023

While economic news is steadily improving, consumers globally are still feeling the pain from high inflation and lending rates. Wage growth kept pace when prices started to rise, but it has fallen short in recent months with most of that growth benefiting higher-than-average earners. One way this has manifested in today’s environment is in the labor market. Despite healthy figures monthly and a slowdown in demand, employers are still having a hard time filling positions, and workers are still looking to fight for better working conditions with higher salaries.

Enter the rise in strikes and labor issues throughout the first half of 2023. The year started with an extended contract negotiation period between the Pacific Maritime Association and the International Longshore and Warehouse Union that had slowed worker activity for 14 days. Just a few weeks ago there was more turmoil for port workers, this time in Canada. Dock workers in Vancouver, British Columbia, and Prince Rupert went on strike starting July 1, reportedly looking for higher wages. There is hope negotiations will be finalized this week.

More recently, the negotiations between the United Auto Workers (UAW) and the large OEMs in Detroit kicked off this week. Many report that this could be one of the most contentious negotiations, with many issues such as the migration to electric vehicles (EVs) being hot topics. Wall Street analysts have raised the chances for strikes as a result.

It is not just a US issue. The employees of South African aluminum semis fabricator Hulamin walked off the job indefinitely in a benefits dispute. The workers want the company’s medical aid and pension contributions to be settled separately from salary negotiations. The company is refusing to do so. The National Union of Metal Workers South Africa (Numsa), which represents 1,050 of the 1,800 workers, says it will sustain the strike while production is interrupted and until a meaningful offer is put on the table.

The Cape Times newspaper quoted company executive, Marlene Janneker, as saying: “Operational progress assessments are made on a regular basis and such plans will be deployed as and when appropriate.” In a Johannesburg Stock Exchange filing Hulamin stated: “The strike has arisen due to a dispute on two matters relating to employee benefits. The view of the company is that employee benefits cannot be negotiated outside of a full agreement, which includes all substantial issues that make up employment cost.” Both sides say they are willing to negotiate.

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By Matthew Abrams, CRU Research Analyst, matthew.abrams@crugroup.com