Alu_VZ_2019_Editorial

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Aluminum: Geopolitical Disturbances, but with longterm

positive Outlook

The global commodity markets have been highly volatile

during 2018: The year 2018 will be characterized in

history as a year the raw material price development

has been influenced by several geopolitical disturbances

mainly caused by the United States of America.

Crude oil price influenced by Iran sanctions

The credible threat of the US president to cancel the

nuclear agreement with Iran on 12 May 2018 results in

a jump of the crude oil price. After the enforcing of new

sanctions against Iran by the US during May 2018 the

crude oil price rose above 75 US-$ per barrel Brent

(see slide 1).

Price for oil in US $/barrel

160

140

120

100

80

60

40

20

0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Bloomberg

Slide 1

During the first half of the year 2018, Iran extracted

constantly more on average than 3.8 mbd (million

barrel per day) of crude oil. At the moment around 70

per cent of the Iranian oil production is reserved for

exports. This equals a volume of around 2.7 mbd. A reduction

of the exports by only 0.5 mbd – and the US

aims a significant higher target – will bring the global

oil market into an imbalance. In 2018, the worldwide

demand for crude oil will rise by 1.65 mbd to nearly 99

mbd. Only a part of this future needs could be satiated

by a higher US production.

In 2017, the main customer of Iranian oil exports was

China, which purchases a quarter of total exports. In

addition India, South Korea and Turkey received an important

part of the Iranian production. During the first

half of 2018, India gave notice, that it will expand its

crude oil purchases from Iran significantly. We assume,

that China will ignore the sanctions by the US president.

Instead of lower oil imports, China will use the chance

to improve its position as a supplier of consumer and

industrial goods to Iran.

The announcement of Saudi-Arabia together with Russia

to raise its oil exploration, if necessary, eased the

situation on the global oil market and induced lower

prices. But the highly volatile oil price is a risk for the

further development of the global economy.

Sanctions against Russia affect Rusal

In 2018, even the global aluminum market was negatively

influenced by geopolitical disturbances. The

scarcity of supply in the aluminum market is a problem:

In total, we expect a slight supply deficit for the whole

year 2018. Therefore it was not a surprise, that the aluminum

price sky-rocketed after the public disclosure of

US sanctions against the Russian aluminum producer

Rusal in April 2018. Two weeks later the White House

in Washington has given the Russian group time for a

change of control by the end of October 2018. As a

result, the situation on the global aluminum market has

improved and the price has declined.

But Rusal‘s market power is very important. In the

year 2000, the company was created by a merger

of the aluminum division of Sibirsky Aluminium and

Sibneft. For example, Rusal exported around 3.2

million tons of aluminum in 2017. A loss of these deliveries

would result in an enormous shortage of aluminum

supply within Europe. But in addition, Rusal

is a leading producer of the intermediate product

alumina. Mainly the Irish alumina plant of the Rusal

group secures the input for several European and

American aluminum smelters. But in total the longterm

outlook for aluminum is very positive.

E-Mobility stimulates aluminum usage

The future demand for aluminum will get important impulses

from the automotive industry. In 2024 a global

production of around 108 million light vehicles (up to

2.8 t) will be seen with China as the leading manufacturing

location: Nearly one third of all cars will then be

manufactured in this country (see slide 2).

Light Vehicle production in Mio

120

100

80

60

40

20

0

Source: IHS June 2017

Slide 2

2014 2016 2018 2020 2022 2024

Japan/Corea South East Asia China

Middle East/Africa Europe Southamerica

North America

The current discussions concerning pollutant emissions

and the resulting chances in the power train have

tremendous consequences concerning the usage of

aluminum. Several forecasts assume, that up to 7

per cent of all sold light vehicles will be based on

the hybrid technology in 2025. For the year 2025 a

production volume of between 108 and 110 million

light vehicles will be expected. This will result in a

sales volume of between 7.5 to 7.75 million hybrid

cars. Therefore the total number of manufactured

cars with a combustion engine will stay on a stable

level. Other forecasts are less optimistic concerning

the sales figures of hybrid cars.

Besides the hybrid sales we have to add the production

of pure e-vehicles with a battery solution. New

forecasts expect strong declining production costs for

batteries, therefore battery e-vehicles will become cheaper

and the price difference to gasoline or diesel driven

cars could be reduced. Some estimations calculate,

that as a result of an increased number of e-vehicle sales

worldwide a quarter of all cars could be e-vehicles

in 2040. But by 2025 a share of in maximum 5 per cent

seems more realistic (see slide 3).

E-Mobility Forecast: Battery solutions achieve 2040 up to 25 %

market share

Mio. solded automobile per year %-share solded new cars/year

140

100

120

80

100

80

60

60

40

40

20

20

0

0

2015 2020 2025 2030 2035 2040

ICE + HEV BEV PHEV Electric cars in % of new cars

Comment: PHEV = Plug-In hybrid electric vehicle; BEV = Battery electric vehicle; ICE = Internal combustion engine; HEV = Hybrid electric vehicle

Source: Bloomberg; IKB Research

Slide 3

In e-vehicles the higher weight of the battery has the

consequence, that weight reductions elsewhere in the

automobile become necessary. This will induce a rising

number of lightweight solutions in car manufacturing

and will have an increasing usage of aluminum and to

a certain extent magnesium in the automobile as a result.

Within the different steel grades we see a general

trend to move away from conventional steel towards

high tensile steel grades.

Even the production of medium and heavy vehicles

gains from a stronger emission regulation in the European

Union and in the United States of America. These

regulations induce a lower fuel consumption, which

stimulates investments in a newer generation of trucks

and other commercial vehicles. For 2024 a worldwide

production of above 3.6 million commercial vehicles

will be expected (see slide 4).

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Production of medium and heavy vehicles in 1.000/pcs

4.000

3.500

3.000

2.500

2.000

1.500

1.000

500

0

Source: IHS July 2017

Slide 4

2016 2018 2020 2022 2024

Japan/Corea South East Asia China

Middle East/Africa Europe Southamerica

North America

By now, in the commercial vehicles segment (trucks,

busses and other commercial vehicles) diesel fuel dominates

all other types of fuel. Within the next 25 years

different types of electrical drives and other fuel types

will gain market shares mainly in the small transporter

segment and with busses. In the segment of heavy

duty trucks we see bigger chances for LNG (liquified

natural gas). But even if we have a look at an optimistic

scenario for alternative drives: More than half of the

total fuel demand will be concentrated on diesel in the

segment of commercial vehicles.

In the manufacturing process of trucks we see impulses

for a higher demand for aluminum, too. Examples are

a higher usage of aluminum extrusion parts and in the

trailer and superstructures segment, there are additional

application fields for aluminum.

Aluminum foundry production with dynamic

growth

A part of the higher usage of aluminum in the car manufacturing

process will lead to a rising aluminum foundry production.

In the year 2016, the global aluminum cast production

achieved a new record with around 18 million tons. Therefore

the long-term positive trend towards lightweight production

in the automotive industry has continued. While the

worldwide output of iron and steel cast has grown by 50 per

cent, the aluminum foundry production has risen by the factor

of two-and-a-half since 1999 (see slide 5).

Weltweite Produktion von Eisen- und Aluguss 1999-2017; 1999 = 100

300

250

200

150

100

50

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017p

EST-Guss Aluminiumguss

Quellen: CAEF; Census; IKB-Berechnungen

Slide 5

The German domestic foundry market shows a nearly

similar development: While during the period under review

the output of iron, ductile iron and steel cast grew

by only a sixth part, the aluminum cast production expanded

by around 90 %.

Even in the future the worldwide growth in the aluminum

foundry production will continue. A higher output

of aluminum cast will be seen in all major regions in the

world, while the growth in iron and steel cast is regionally

more limited.

Mainly China expanded its aluminum cast strongly:

In 2015, the 6-million-ton target was exceeded with a

total of 6.1 million tons. The Chinese output grew by

800,000 tons in 2016: This equaled the annual production

of Italy! In May 2018, during the annual congress

of the Chinese Foundry Association another increase of

400,000 tons was announced for 2017. As a result, the

7-million-ton level has fallen.

For Germany, we forecast another rise in aluminum

cast output: In 2025, an annual production volume of

1.4 million tons could be reached. If the growth of the

electro mobility is significantly stronger than expected,

the necessary volume of aluminum production is considerably

higher than this volume. The weight of the

battery, which exceeds very often 200 kg by relevant

powertrains, will have to be reduced in other parts of

the car, which gives an additional stimulus for aluminum

foundry products.

In addition to the car manufacturing industry some

other important customer industries will give positive

impacts on the further demand for aluminum. We see

a positive development for the construction sector in a

lot of regions in the world. Mainly the expected new

so called „Megacities“ (urban regions with more than

10 million inhabitants) will result in a jump in aluminum

usage.

For the aircraft building industry some more years of

strong growth will be seen: The order books of the two

leading manufacturers Boeing and Airbus as well as

of some producers of regional aircrafts are currently

well-filled. If we look at the material mix in the aircraft

manufacturing we see no shift towards carbon fibre

materials, more realistic is a move back to aluminum.

Despite the fears of a tougher worldwide trade war

between the US and the rest of the world we see an upturn

in the global mechanical engineering sector. As a

result of its excellent barrier characteristics, aluminum

will play a prominent role in the packaging industry

even in the future.

Only few new capacities of primary aluminum …

In the first half of 2018 the worldwide primary aluminum

production fall slightly below the level of the previous

year. For 2018, we forecast a global production

of around 64 million tons of primary aluminum. The

Chinese production was around 2 per cent below the

level of 2017. The main reasons were the closure of

aluminum plants during the weeks of congress of the

communist party and in addition new environmental

regulations. But we expect, that the lower volume will

be compensated by the end of the third quarter 2018.

In the other parts od Asia we see a strong rise in aluminum

production of nearly 16 %. The aluminum plants in

the countries of the Gulf region report higher volumes,

too. In Europe in total the production stabilizes, while

in North and Latin America the output has declined significantly.

The inventories of primary aluminum at the LME diminished

a little: They fluctuate at around 1.1 million tons.

The stocks at the SHFE decreased to 881,000 tons. In

the warehouse of the Comex only around 8,000 tons

are stored. But in total the market supply is on a satisfying

level. At the LME, the inventories of the aluminum

alloy equal only 13,500 tons.

In the long term we see a rising importance of aluminum.

Currently, the net-addition of new capacities

for primary aluminum is very limited. As a result, we

forecast only a very small extension of the production

possibilities during the next five years (see slide 6). For

2022 we forecast a worldwide production of primary

aluminum of 65.5 million tons, of which around 37 million

tons will be produced in China. At least another

10 million tons of primary aluminum will be generated

in other Asian countries including the countries of the

Gulf region. Especially the countries in the Gulf region

use very cheap natural gas to run the aluminum electrolysis.

Production of primary aluminium in 1.000 t

70.000

60.000

50.000

40.000

30.000

20.000

10.000

0

2002 2004 2006 2008 2010 2012 2014 2016 2018p 2020p 2022p

Oceania America Africa China Asia without China Europe

Source: Metallstatistik; World Aluminium; IKB Research

Slide 6

p = Prognosis

If we have a look at the European primary aluminum

production, we expect a slight extension in Western

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Europe, in Eastern Europe a further increase could be

possible.

We see some chances for a recovery of the primary

aluminum production in the Americas. But a higher

production in the US will not be the result of the new tariffs

of ten per cent on aluminum imports introduced by

president Trump: An increase in the domestic aluminum

production will come from a general improvement of

the automotive production and the aircraft manufacturing.

In 2017, the American aluminum production was

more than 35 per cent (in total around three million

tons) below the level of the year 2008. In the United

States of America the primary aluminum output declined

to 740,000 tons in 2017: Only a little bit more than

a quarter of the volume of the year 2008.

… but expansion of recycling aluminum will come

While the extension of the primary aluminum capacities

is limited an increase of the recycling aluminum production

is necessary. In contrast to the significant decline

in the primary aluminum output, the production volume

of recycling aluminum was relatively stable in the

USA (see slide 7). In addition, both neighboring countries

– with the same new tariffs on aluminum imports

like Europe – were able to hold their production level

of recycling aluminum during the last years. In the year

2009, the European producers had to accept a strong

fall in the recycling aluminum output as a result of the

global economic crisis: But they were back very quickly

on the pre-crisis-level in the year 2011.

During the last fifteen years the strongest growth rates

among the leading producers of recycling aluminum

were seen in China: But by now, the country has not

reached a similar dominant position in the secondary

aluminum production as in the primary aluminum market.

For the next few years we forecast a catch-up and

an expansion in the recycling aluminum production.

The acquisition of recycling know-how via the takeovers

of companies in the Western European environmental

sector and Asian subsidiaries, mechanical engineering

companies specialized in recycling technics

and the headhunting of managers with recycling skills

are first signs of this trend.

Even if we have seen a recovery in the recycling aluminum

output in Japan, the production is still twenty per

cent below the prior peak level of 2008.

Production of Recyclingaluminium 2016; Shares in %

remaining Afrika

America >1%

9%

Source

: Metallstatistik

Slide 7

USA

36%

remaining Asia

9%

Europe

26%

China

20%

For Europe we forecast a further expansion in the capacities

for recycling aluminum. The main reason for

the net-additions of capacities for recycling are the lower

energy costs in relation to those for the manufacturing

of primary aluminum. New capacities respectively

capacity extensions will be seen e.g. in Latin America,

South Africa and some other Asian countries.

Conclusion

Even if the current geopolitical and trade environment

shows several high risks for the global economic development,

IKB sees the medium- and long-term outlook

for aluminum very positive. During the next decade the

requirement for aluminum will go into the direction of

80 million tons.

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