Aluminum Market Trends & Prices
COVID-19 Industry Brief
EFFECTS OF THE CORONAVIRUS ON THE Aluminum INDUSTRY Update June 11, 2020
- Market Dynamics: Because the aluminum market is worldwide, it is subject to price fluctuations resulting from regional and global supply disruptions and economic activity, especially in the key industries that are the primary market for aluminum. These include transportation applications (39% of U.S. market), packaging (19%), construction (14%), electrical (9%), consumer durables (8%), and machinery (8%), among others. Supply is provided by a combination of domestic suppliers, imports, with a significant amount of volume also coming from recycling sources; there are only a handful of companies in the United States providing a primary source for aluminum.
- Pricing Metrics: The Platts Aluminum Midwest Premium, which benchmarks U.S. pricing over the London Metal Exchange price, shrank to its lowest level in 32 months in May 2020 due to weak market conditions. Pricing recovered a fraction in June, as the market began to see some small signs of life. Market conditions were weak throughout April and May as the automotive sector was shut down and other industrial sectors were weak. Market commentary in April among traders related to the volume of material heading to urn makers due to COVID-19. Market participants report slowly increasing demand for June with expectations of the market firming considerably in July. Aluminum billet prices for Midwest delivery as of early June had recovered about 12 percent from lows reached in mid-May. Average billet prices for April and May were about 18 percent off January 2020 averages. Through June 10, average prices were 13 percent off the January benchmark.
- Key Customer Closures: Impacted heavily by assembly plant shutdowns in the automotive industry, aluminum has also been impacted by weakness in the commercial aviation sector, which has been hammered by the lack of passenger demand, regional travel restrictions, and non-essential worker orders. The total closure of the Boeing assembly plants in the Puget Sound area in April and May, and weaker prices in the Asian marketplace and Europe, have also contributed to weaker pricing and volumes. Recent re-openings in all sectors have improved market sentiment, but actual transaction volumes remain weak.
- Valuation Metrics: Gordon Brothers expects a decline in inventory appraisal values based on pricing direction, a reduced order book going forward, as well as delayed and cancelled orders. Uncertainty and dim market sentiment will weigh down values as well.
Date March 2021
- The COVID-19 pandemic hit the U.S. aluminum sector hard causing a sharp drop in demand and pricing. Prices reached an 11-year low on April 8, 2020.
- Worldwide production and mining levels were affected in the first half of 2020 because of pandemic-related issues; however, worldwide production levels remained relatively stable and ended the year higher by 3.1%.
- End-market demand varied by sector with the construction and packaging sectors strong; however, the automotive and aerospace transportation markets were affected for most of the year.
- Aluminum tariffs implemented during the U.S. and China trade war remain in place but have been softened by multiple country specific exclusions. Market sentiment anticipates these tariffs will be unwound in the near future.
Approximate net recovery on cost
Effects of COVID-19: The COVID-19 pandemic hit the U.S. aluminum sector hard causing a sharp drop in demand and pricing. The price of high-grade aluminum ingot as reported on the London Metal Exchange reached $1,422 per metric ton on April 8, 2020, a level not seen since May 2009. While prices have subsequently rebounded and exceeded early 2020 pricing levels as of April 2021, the overall sector was negatively affected by the drop in pricing and demand.
U.S. aluminum production and mining capacity utilization dropped below 80% for the first time since October 2009. Smelting capacity utilization dropped to 55.9% from 61.1% in 2019. Supply is provided by a combination of domestic suppliers and imports with a significant volume also coming from recycling sources. There are only a handful of companies in the U.S. that provide a primary source for aluminum.
While the sector was considered an essential industry, the shutdown of much of the aerospace and automotive industrial sectors dropped shipment demand by upwards of 30% to 50% in the second quarter of 2020. In early June most primary mills and extruders were running at reduced capacity, some as little as 30% to 40% of normal levels. Mill product net new orders were down 27.6% from 2019, foil orders were off 30.3% and extruded products orders were down 38.7% as of May 2020.
Worldwide production and mining levels were heavily affected in the first half of 2020 because of pandemic-related issues. However, worldwide production levels remained relatively stable and ended the year higher by 3.1% driven by strong production growth in China, Canada and Bahrain. Despite a drop of 9.3% in U.S. production in 2020, Chinese production grew by 5.4% buoyed by strong demand from construction and infrastructure projects.
Additionally, aluminum production in Canada grew following the passage of the United States-Mexico-Canada Agreement (USMCA) related to intercontinental trade and a 2019 rollback of the U.S. tariff on Canadian aluminum imports. Canadian imports of aluminum to the U.S. resumed and was largely responsible for the year-over-year growth in Canadian aluminum production in 2020. Canadian production was lower in 2020 over 2018 and 2019, so much of this growth was a rebound to normal levels of imported product.
End Market Performance: Aluminum is consumed in a variety of end industries in the U.S. including transportation applications (34%), packaging (16%), construction (12%), electrical (9%), consumer durables (8%) and machinery (8%), among others (13%). Transportation sector production levels, most notably automotive and aerospace, were off considerably in 2020 from 2019 levels. Both automotive and aerospace manufacturing levels are expected to be down approximately 30% for 2020 compared to 2019.
A strong housing market with starts and completions up 6.9% and 2.5%, respectively, and public construction spending trends, which were up 4.9% over 2019 are also positive drivers for the industry. Demand in other sectors was robust with packaging demand improving aided by strong demand for aluminum cans, which totaled 121 billion units in 2020 versus 115 billion in 2019.
Despite the ongoing pandemic, the worldwide demand outlook has been strong overall with expectations for 3.8% growth in 2021 over 2020. The pace of growth in the U.S. and Canadian markets is expected to be more subdued at 2.3% and 0.9%, respectively. Despite concerns regarding a supply overhang until some of the restocking-related pandemic supply chain issues are resolved, current market dynamics are very tight.
In recent market commentary from S&P Global, Platts’ analysts noted the Midwest transaction premium was low to attract imports at an adequate level. Most current inquiries are not from exporters looking to sell. Rather, they are from exporters notifying buyers about late shipments stating, “Logistics issues continue to plague the market and freight rates remain high.”
Lingering Trade Policy Issues: Aluminum tariffs implemented during the U.S. and China trade war in 2018 remain in place but have been softened by multiple country-specific exclusions. Market sentiment anticipates the 10% section 232 tariff will be unwound entirely at some point soon.
The U.S. Department of Commerce initiated a countervailing duty (CVD) investigation of imports of common alloy aluminum sheet from 18 countries in March 2020. One year later in March 2021, the U.S. International Trade Commission ruled CVD rates, which affect approximately 17.3% of total domestic aluminum imports based on 2019 data, could be established in the case of 16 of these 18 countries. The rates for those 16 countries are set be determined in April 2021. The U.S. Department of Commerce issued its preliminary determination of the CVD investigation of foil imports from China in June 2020 and set preliminary subsidy rates on two Chinese importers of foil products. While the USMCA entirely rolled back the effect of the section 232 tariffs with Canada, current trade policy has provided some level of protection against aluminum imports from the rest of the world.
Aluminum Types Impact Recovery Values: Aluminum is produced in a variety of forms and alloys. Base aluminum prices are tracked for either billet or scrap, but most aluminum is sold and used in a fabricated form such as sheet and coil, bar stock, extrusions, forgings and castings, among others.
For certain applications, such as aerospace and military, aluminum may be produced in proprietary grades to conform to industry specifications. As such, the cost and value of fabricated aluminum is more difficult to update and track while the price of base billet can be tracked daily.
In a liquidation, the value of aluminum is driven by marketplace demand and need, with proprietary forms of aluminum, absent a waiting customer, generating a scrap value. Aluminum products in standard sizes and quantities with materials certifications that are widely used generate strong recoveries in the secondary marketplace.
Inventory Costing and Mark-to-Market Reserves: When a company’s inventory contains commodity-type items like aluminum, which are subject to frequent price fluctuations, it is imperative to understand the company’s inventory costing methodology. A standard cost approach includes updating inventory costs periodically and, depending on the frequency of the update, can result in the company’s reported cost varying from the market in an inflationary or deflationary environment. A rolling weighted cost approach utilizes an average weighted cost for each purchased item that equates to a rolling perpetual average.
This methodology is useful for commodity-type items as a company’s reported cost will remain more in line with the market, although costs will still trail market prices by a set period. Given the volatility in the aluminum market, lenders should be aware of the target company’s costing methods and should consider incorporating a mark-to-market or lower-of-cost-or-market reserve. A mark-to-market reserve account will adjust the cost basis to market and ensure an advance rate, based on a percentage of cost, remains relevant even in a volatile market.
As a result of increased pricing and ongoing market volatility, borrowers may face unexpected cost increases that could compress margins. Operators who work on a project basis are most vulnerable since input prices may differ at the time materials are purchased from when contract prices were agreed upon. On the other hand, recoveries on existing aluminum inventories may benefit from reported cost varying from market price in an inflationary or deflationary environment.
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Reference sources: LONDON METAL EXCHANGE, U.S FEDERAL RESERVE, U.S. GEOLOGICAL SURVEY,
IBISWORLD, INNVESTOR REPORT, S&P GLOBAL PLATTS, THE ALUMINUM ASSOCIATION, U.S. SECURITIES
AND EXCHANGE COMMISSION