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unlikely to reach the levels that iron ore has.
Where is the value?
There was agreement that value is diverging,
with a movement upstream towards bauxite
and downstream towards rolled products.
The challenging environment developing
at the upper end of the value chain has contributed
to the shift in profitability. As supply
of feedstock tightens and sources become
less clear, prices are expected to rise and
lesser known bauxite producing countries
will emerge as front runners of supply. It is
thought that this uncertainty in the upstream
industry could potentially be the production
constraint that the industry needs to curtail
primary production.
At the other end of the spectrum, the rolled
products market is benefitting from a surge in
demand driven by the transport and construction
sectors. Investments into research and
development for aluminium uses have been
prolific in recent years, and with the automotive
and aerospace industries in particular
realising the benefits of aluminium, there is
scope for significant growth. Low primary
prices have benefitted the downstream industry
and increased the competitiveness of
aluminium as a substitute for other materials
in transport sector.
Aluminium is able to provide automotive
manufacturers with significant weight
reductions and therefore better fuel savings
and lower emissions. For every 10% saving
in weight, a 5 to 7% saving can be made on
fuel. This has a number of beneficial knock­on
effects for: (a) the consumer as cars require
less fuel, (b) the producer as weight saving improves
performance and (c) the environment
as automotive emissions are reduced.
the demand for sustainability
With respect to ‘recycling’, there was agreement
that legislation would, in time, need to
be revised to better represent the changes in
consumer usage today. Scrap was identified as
a major opportunity for Europe to retain aluminium
production while primary producers
suffer with tougher operating environments.
The demand for specialised alloys from secondary
material is also growing strongly, driven
primarily by the automotive sector.
Europe has the opportunity to capitalise on
this growth to ensure that it is not merely a
scrap exporter, but that it is following in the
footsteps of other regions and ensuring that
value is being added to resources before
export. In this case, Europe’s resource is its
significant scrap pool, which, under current
forecast consumption rates will continue to be
a major source of aluminium for many years
to come.
Growing importance of sustainability within
the industry is demonstrated by Novelis
Europe with an ambitious target for 80% of
their material to be from recycled products
by 2020.
What does the future hold
for the aluminium industry?
The outlook for aluminium, according to many
industry experts, remains dependent on the
actions of the LME. Tackling the issues surrounding
premiums and warehousing are integral
to improving the current imbalance in
the market. Others believe much of the
blame lies with producers who continue to
ignore ‘free market commercial signals’ that
call for greater control and curtailment in
production. In reality, it is perhaps the responsibility
of both the aluminium producers and
the LME to take active steps towards a resolution.
Producers must cut high cost capacity
and ensure that capacity is built in response
to demand instead of other industry factors.
Meanwhile the LME, facilitators of the current
surplus market, must look for a way to reduce
the influence of the financial community on
the LME price, and instead adopt a pricing
mechanism that better represents the fundamentals
of the market. The most recent commitments
by companies to curtail production
will steadily reduce surplus, and this, paired
with strengthening demand across the value
chain, provides potential respite for the situation.
Aluminium, unlike a number of other metal
markets, has never seen the commodities supercycle
reflected in its pricing. The boom in
commodities prices, partially fuelled by China,
had significant impacts on the iron ore and
copper markets but the fundamentals of the
aluminium market have worked against such
significant price escalation. With the easing of
Chinese growth, sentiment in such China­centric
markets has suffered, and now the lack of
a supercycle in the aluminium industry can be
viewed as a benefit.
Over the next few years, as other industries
struggle with changes in market factors that
are essentially out of their hands, aluminium
is in a stronger position to make the necessary
changes from within the industry itself.
Author
Pernelle Nunez, consultant, CRU Strategies
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