Conference Review

Aluminum Supply/Demand, Economics and Energy

~ ___ BeIge Forberg Technical Manager, National Southwire Aluminum

INTRODUCTION In a special session held as part of

the TMS Light Metals Committee programming at the 1985 AIME An-nual Meeting in New York City, is-sues about aluminum supply/de-mand, economics and energy were discussed. The session provided an accurate perspective of the alumi-num industry's situation in this decade. The presentation of five in-vited lectures was followed by a pan-el discussion. These proceedings were not published as part of the book Light Metals 1985 but are being made available in a special TMS publication. The following is a brief synopsis of those proceedings.

The Dynamics of the Primary Aluminum Business Robin G. Adams, President, Resource Strategies, Inc.

While much of the demand for commercial aluminum has been on a down-swing, the metal can mar-ket has consumed a tremendous amount of the light metal. In the ten year period between the mid-1970s and the mid-1980s, the con-sumption of aluminum cans has in-creased 136.7%. Aside from this dra-matic increase, almost all other gains in aluminum consumption have taken place in the automotive (+21.5%) and transport industries (+4.6%). Thus, the growth of the aluminum industry over the last ten years is almost directly attributable to the metal can market (Table I). With this finite market nearly cornered, continued expansion is expected to drop drastically to only about 3% growth per annum in the long-term.

While the auto industry has accounted for a sizeable increase in aluminum consumption, the trend is not quite as optimistic as the statis-tics initially indicate. Aluminum made significant inroads to the auto-motive industry during the late sev-enties when the accent was on de-veloping a short-term response to auto weight and fuel inefficiency problems. With the price of alumi-num higher than that of traditional

JOURNAL OF METALS· August 1985

materials, the auto makers developed fundamental engineering changes that allowed them to embark on their current trend away from aluminum.

With the strong markets exhibiting decreased consumption, and with the depressed markets bottomed out and heading back towards equilibrium, overall aluminum market projections predict the U.S. annual growth rate of more than 1% and a worldwide annual growth rate of 2-25%.

The reasons for this market fluc-tuation are many-fold. Since alumi-num is frequently used in consumer durable goods, it is extremely sensi-tive to changes in the gross nation-al product. Periodic declines of at least 20% are not uncommon, and aluminum companies must plan accordingly. In contrast to this vola-tility of demand is the continuous process industry of aluminum smelt-ing which is difficult, for logistic and legal reasons, to gear up and down with rising and falling demand. These conditions promote inflated in-ventories that cause deflated alumi-num prices.

Assessment of the U.S. aluminum maker's ability to compete with for-eign suppliers is significant toward understanding the current market position and forecasts. Faced by state-of-the-art industries with low-er energy and labor costs, as well as governmental subsidies, the U.S.

industry is experiencing severe com-petitive problems. If further deterio-ration in this position occurs, one could effectively argue for the clos-ing of domestic smelters in favor of building state-of-the-art facilities at overseas locations. Table II compares a middle-aged U.S. plant, build in the period 1965-70, with state-of-the-art costs.

To regain a firm competitive posi-tion, U.S. aluminum makers must effectively address the market ero-sion caused by high energy and la-bor costs, excess inventories, foreign competition, changing market needs, and the handicap of a strong U.S. dollar, which automatically reduces the costs of all non-U.S. equivalent factors.

Trends in Aluminum Power Costs Peter C. Moss, Vice President, CRU Consultants Inc.

According to a multi-client study by CRU on power costs at alumi-num smelters, the capacity-weighted average power price for non-socialist world smelters fell by 14% from 1981 to April 1984: from 22.2 to 19.0 US mills/kwh. Four factors are primarily responsible for this trend: (1) local currency power rates, espe-cially in Europe, have risen slowly if at all; (2) new capacity has gener-ally secured power at rates below the existing average, and so reduced

Table I. U.S. Consumption Trends for Aluminum (mn Ibs)

Average of Average of 1973174 1984/85

Market Peak Years Forecast Change Construction 3381 3013 -10.9% Automobiles 1150 1397 +21.5% Other Transport 1448 1515 +4.6% Consumer Durables 1246 1230 -1.3% Electrical 1845 1492 -19.2% Machinery 993 924 -6.9% Metal Cans 1424 3370 +136.7% Other Packaging 750 781 +4.1% Miscellaneous 1044 956 -8.4% TOTAL 13281 14678 +10.5% TOTAL EXCLUDING CANS 11857 11308 -4.7%

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Table II. Old U.S. Plant vs. Stat~of-the-Art Costs

U.S. Labor

Man-hrs 10.5 $/hour 21.0 Total/t 220.50

Power Kwhllb 7.5 Mills/kwh 24.5 Totallt 404.98 Total Cost 625.48 Gross Savings Less Transportation/duty Net Saving Capital Financed* by these savings ($/Ann tonne)

• At 12% over 20 years.

the average; (3) some old capacity, with high power rates has been closed iIi Japan and the U.S.; and most importantly, (4) the apprecia-titm of the U.S. dollar since 1981 has reduced non-U.S. rates. Because of this last factor, world average power costs declined 14% during a three-year period while the U.S. av-erage increased by 14%, a difference of 28%.

The aluminum industry cost curve has shifted downwards because of changes in power costs, exchange rates, and a large decline in alumi-na prices. Large volumes of alumi-na are being sold or transferred at market, or market related prices. This can be substantially lower than prices based on total production. The variable costs have also been lowered by the introduction of new low-cost capacity smelters in Australia, Can-ada and Latin America.

All these factors indicate a decline in the competitiveness of U.S. smelt-ers served by high-priced power suppliers. In response to this, power utilities and aluminum producers have considered power discounts in exchange for gUaranteed minimum power usage, as well as a link be-tween the prices of power and aluminum. This linkage would be viable for power companies with low variable costs, such as nuclear and hydro plants, and impractical for companies dependent on variable fuel costs, such as fossil fuel plants.

While this would be beneficial to the companies immediately affected, the overall industry would be faced by new problems. Marginal produc-ers would become more competitive, while the industry's supply response to price movements would be nega-tively altered: prices could fall to lower levels before cutbacks were introduced; and the "swing" capaci-ty would tend to diminish, produc-ing a more sluggish response to

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New Location in Australia Canada

7.0 7.0 14.00 16.50 98.00 115.50

6.2 6.2 12.5 8.5

170.81 116.15 268.81 231.65 356.67 393.83

88.16 66.12 268.51 327.71

2005 2448

price changes. Carried to extremes, metal-linked power prices could be seriously destabilizing to the alumi-num industry.

Aluminum Market Outlook Stewart Spector, President, The Spector Report Inc.

Despite a strong recovery by the U.S. economy, and record aluminum shipments in 1984, the aluminum industry has moved backwards by overproducing. This has resulted from increased efficiency and the strength of the U.S. dollar. As effi-ciency increased production capabil-ities, aluminum buyers were fearful of severe price increases and pur-chased forward to meet their long-term metal needs. After meeting this heavy demand in 1984, U.S. suppli-ers were faced with overproduction, the increasing strength of the dollar, and little demand. As a result, one billion pounds of excess aluminum went into inventories.

Accordingly, the aluminum indus-try is in a state of imbalance. The easiest and quickest way for a com-modity system to rebalance itself is to recognize the changing fundamen-tals and reduce production to lower inventory. Towards this end, the next five years appear to be shap-ing up as follows. • Gravity and the trade deficit

should brake the rise of the dollar. An exchange rate crisis exists among many U.S. trading partners, and interest rates are increasing in economies still in the early stages of economic recovery.

• In 1985, the U.S. economy will continue to grow while non-U.S. industrial economies many expand at a faster rate than 1984. This forcast could be adversely effected, however, by rising interest rates.

• After a business slow-down in 1986, the world economy should

resume more rapid growth through 1990 .

• Long-term interest rates and infla-tion should trend down during the forecast period.

• Aluminum production capacity should decline throughout 1985 and 1986 with most of the decline taking place in the United States. The severity of the drop will de-pend on the dollar price of alumi-num ingot and the result of renego-tiating power and labor contracts. With new facilities being built out-side of the U.S., world primary capacity will begin expanding anew in 1987. Using this forecast, the aluminum

industry should be rebalanced by 1987 or 1988, and by the end of the decade, primary ingot could be in tight supply. U.S. aluminum needs will be met by a combination of do-mestic production, increased imports, and recycling. If all goes as predicted, world shipments over the next sever-al years should rise by an average of 5% per year, and excess world inventories could be worked down even if production rises.

Aluminum Recycling: EconOmic Potential and Limitations James M. Creel II, Director of Tech-nology and Quality Assurance, Recycling & Reclamation Division, Reynolds Metals Company

Aluminum is famous for its versa-tile recycling capabilities. It can be recycled and reclaimed from a varie-ty of sources including internal or runaround scrap (scrap internally generated by an aluminum fabrica-tion operation), old scrap (scrap that has completed its useful product life), and new scrap (scrap that re-sults from a fabricating operation).

The potentials of aluminum recycl-ing are multi fold. Along with the inherent value and ease of recycling, the technique saves 95% of the ener-gy required to produce aluminum from bauxite. In addition to econom-ic and environmental considerations, recycling potential also helps reduce the dependence of the U.S. on alumi-num imports. .

One foreseeable problem with re-cycling is possible cross-contamina-tion with aluminum alloyed products, such as two and three percent lithi-um in aluminum plate for aircraft. If this scrap were to mix with pure aluminum scrap, severe refractory corrosion problems in the furnaces could result. To avoid this situation, a system for proper handling and identification of scrap would have to be implemented. Another restriction stems from materials immediately in contact with the aluminum surface,

JOURNAL OF METALS· August 1985

!';uch as laminated coatings of plastics; ceramic, graphite or other fiberous material reinforcement; and various metallic laminates and/or zinc coatings. This situtation can also be handled as long as the prop-erties of the other material are recognized.

One immediate problem facing recycling efforts are govenmental restraints. Many municipal, county and state governments are restricted in processing waste products by legis-lative constraints and make changes accommodating recycling only on an as needed basis. The relatively poor track record of previous solid waste operations has proven to be a deterent toward encouraging change. As of late, however, these operations have shown more success and could find greater implementation.

Much to its benefit, aluminum shows long-term economic potential and stability. While plastics makers are attempting to capture a sizeable portion of the can market, plastics are working from a double handicap: they cannot be recycled easily and their manufacturing costs are de-pendent on the going oil rate. In these two critical areas which can severely effect pricing, aluminum holds a strong advantage.

Potential and Problems of the Aluminum Industry Kenneth J. Calhoun, Manager of Economic Analysis, Aluminum Com-pany of America

Recently, such factors as price instability, a strong U.S. dollar (which initiates exchange rate fluctua-tions and competitive cost positions changes-Figure 1), increased ener-gy costs, and a shift toward pure competition (as of this writing, there are 83 separate producing com-panies-Figure 2) have all drastical-ly influenced the conditions the alu-minum industry must operate under. Approximately 40% of the companies are operated with active governmen-tal interaction. When industries be-come socialized, the profit motive is diminished and market responses are less rapid. The responsibility to balance supply and demand, there-fore, fall more heavily on the free enterprise sector which is shrinking and which is mostly in North America.

Most critical is the strenth of the U.S. dollar which has handicapped every U.S. company with global competition. As U.S. producers pay costs in dollar terms, foreign produc-ers pay for their power and labor with local currency. Prices that are breakeven, at best, to U.S. alumi-

JOURNAL OF METALS • August 1985

DOLLARS

8r-------------------------------------------,

4

3~~ __ ~~~~~ __ ~~ __ ~~~ __ ~ __ ~~~ __ ~~_' 1 4 234 234

1981 1982

Figure 1. This chart shows how much the dollar has appreciated against a basket of European currencies since 1980. If you had one-half of a British pound; 1000 Italian Lira; 5 Swedish Kr; 5 French Fr; DM and 2 Swiss Fr in 1980, you could have exchanged that basket of currencies for U.S. $7.00.

% CAPACITY 1960·S·1980·S

100J:==::::::::::::::=======:::====:::-==~~~~~~~JAPANESE 1 DEVELOPING GOV'T GOV'T

80r---------_

60

40

20

O~----------------------~~----------------------~ 1960'S 1970'S 1980'S

Figure 2. In 1960. about 70% of the Western World capacity was located in North America, mostly held by Alcan, Alcoa, Kaiser and Reynolds. Today, less than half is located in North America and the biggest growth has occurred in the rest of the world category which includes Latin America, Africa and the Mid-East and Asia. Twenty-five years ago, almost 90% of the Western World capacity was held by private enterprise. That percentage is now no more than 60% and a clear trend to greater government participation seems apparent.

num produces are profitable to for-eign competitors.

There are encouraging signs, how-ever, for U.S. aluminum producers. U.S. aluminum industry manage-ment is showing an awareness that new strategies must be developed to fit the new environment. Tremen-dous growth potential is also availa-ble in countries where per capita consumption is five pounds or less per year (U.S. aluminum consump-tion is 50 pounds per capita per year). The current supply curve is flattening rapidly which reduces price volatility. Fewer price fluctua-tions should result. Energy costs are expected to remain stable if not de-cline in real terms. A renewed em-phasis on cost reduction and produc-tivity will lower the real price for aluminum and thus enhance its com-petitive position against other mate-rials which will help to expand

markets. The U.S. economy is expected to expand throughout the next decade and the demand for alu-minum is expected to grow with it.

Aluminum makers can expect to see a greater increase in demand from such markets as beverage cans, the food can area, easy-to-use con-venience packages, asceptic packag-ing, aerospace industries, defense markets, and ground transport.

To accomplish these greater goals, aluminum industries must deal suc-cessfully in commodities as a low cost producer. Successful companies will be the ones recognizing the forces of change and focusing their resources in the areas where they have or can achieve competitive advantage.

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