CRU Aluminum: Inflation Continues To Put Pressure On Supply Chain

Another area that inflation has consistently affected is profitability. Looking at the Q4 reports from most large primary aluminum producers, both shipments and revenues were up year over year (y/y), but ebitda took a hit. Further down the value chain, the same issue is apparent. The Producer Price Index sits higher than normal and, like consumer inflation, is proving to be very stubborn. Most producers of rolled products and extrusions were able to push through a small price increase on their conversion fees in the beginning of the year to improve profitability in the face of these inflationary pressures. This increase was pushed through with a simultaneous drop in billet premiums keeping the all-in price very similar to 2022. This likely lowered the resistance to the bump in the face of cooling demand.

Keeping these conversion fees higher could prove to be a challenge, specifically for extruders. The dip in demand forecasted for the mid-part of 2023 will put downward pressure on both these prices and extruders who will be battling higher input costs vs. retaining customers. Imports are also at historically high levels for extruded products, including windows and doors, as they flow into the region from Vietnam, Turkey, the Dominican Republic, and Mexico at elevated rates.

Regional Differences In Housing And Scrap Pricing Grow Larger

As 2023 progresses, regional differences make analyzing US demand more difficult. This is very apparent when looking at building and construction. Not only are housing starts and permits trending differently, but construction spending also varies wildly. For example, The Northeast has seen a decline in private construction spending starting in October, while other regions did not slowdown significantly until December or January. The Midwest and Southwest are two of the larger housing markets where double-digit growth up was evident until November before declining. The biggest decline overall was in the Southeast region.

Demand trends are not the only difference between the regions. Market feedback from secondary sources and consumers indicated distinctly regional patterns for scrap availability and activity in February. West Coast operators were nearly unanimous identifying good, early-year availability of metal units. Note that these observations came in prior to the unusual snowfall in Los Angeles basin recently that will slow that trend.

And, while on the West Coast market, positive news is emerging from the West Coast port labor negotiations. The International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA) claim to be making progress on a new agreement for their 22,000 employees and 29 ports. Working without a contract since July 1, 2022, containers have been diverted to other US ports along the Gulf Coast and East Coast to avoid any potential strife. A more optimistic view for West Coast ports may have signaled a return to exports of scrap from West Coast secondary metal outlets, but US demand and current prices make that less likely.

Weather is another regional story impacting aluminum markets as winter storms slammed the West and Midwest regions making logistics difficult. On the other hand, recent winter storms had a positive effect on the Mississippi River’s water level and helped lift previous restrictions on barge traffic.

Premiums Hold Steady After Tariff Announcements

In the past, when news such as the new tariffs on Russian aluminum are announced, prices respond. This is especially true for the Midwest premium, which jumped roughly $0.10/lb in both 2018 when Rusal was sanctioned and early 2022 when the war in Ukraine started. Currently, however, the market is still remarkedly stable. The premium has remained at $0.29/lb for over a month and later periods in 2023 have strengthened slightly as the backwardation declines. The stabilization of major inputs to the premium such as ocean and inland freight influenced this slowdown in volatility after the ups and downs of the past six to nine months.

By Matthew Abrams, matthew.abrams@crugroup.com