CRU Aluminum: Highlighting the Current Challenges

Written by Matthew Abrams

US Midwest premium has continued to trend lower. Slack end-use demand is the main driver as the CME backwardation holds for dates further out in 2023. Lower freight and weak LME prices lower the replacement costs of aluminum and thus lower the floor for the premium.

Shipment Data Hints Toward Continued H2 Weakness

Isolating the trend line of extrusion shipments shows a slowdown that began in 2018, well ahead of the Covid-19 shutdowns. It corresponds with the first interest rate increase since the Great Financial Crisis (GFC).

Historically, it takes approximately 18-24 months for a rate hike to affect the real economy which lines up. This is logical because higher rates affect the affordability of big-ticket, aluminum-intensive purchases at the consumer level as lending standards tighten at the corporate level. Higher rates also keep potential buyers out of the market for housing and light-duty vehicles while stifling refinancing activity.

It is likely that last year’s breakneck recovery and subsequent deceleration are the normalization periods that will put demand back on the trend line that was forming in 2018. This whiplash effect was amplified by the amount of Covid relief funds that went directly to consumers and led to all-time-high savings rates.

The pandemic also boosted spending on things like housing, RVs, and boats. Now that conditions are normalizing, we are seeing consumers shift their spending back to services, with travel being the most noticeable example.

The same can be said for flat-rolled products (FRP) markets. North American FRP demand remains mixed. Demand for auto, aerospace, and pre-painted applications is still strong. But orders for durable goods, packaging, and building products failed to sustain the gains made in April and May. Overall, total FRP product shipments are down 5% year over year (YoY) through June shipment data.

In Europe, FRP demand was relatively stable month over month (MoM) in July. However, it is too early to call it a turnaround. Aerospace and automotive sectors performed well in Europe, but consumer-related sectors such as construction, packaging, and foil pulled the market down. European extrusions were also supported by strong EV demand, but this was not enough to offset the overall weakness.

FRP demand in China had no notable improvement in July. However, it is believed that the recently approved state measures should support the market. Additionally, China’s auto and EV market is recovering. Indian aluminum demand weakened in July due to seasonal monsoon woes and increasing inflation.

Negative Sentiment Echoed by Novelis and Ball

Novelis and Ball corporation last week had their latest fiscal quarter investor calls. Novelis commented: “The decrease in shipments is mainly due to lower beverage can shipments, as well as unfavorable economic conditions impacting some specialty markets, mainly in building and construction. However, demand for premium automotive sheet remains strong and led to record automotive shipments in the quarter.” Novelis suffered from declines in shipments in all the regions it operates.

Ball announced global beverage can shipments were down 4.9% YoY, excluding the impact of the 2022 Russian business divestment. In North and Central America, the company achieved higher earnings mainly due to incremental inflation recovery and improved operational performance. That was offset by a drop of 8.5% in volumes. Ball also noted that inventory levels for coil aluminum and finished can inventories largely normalized in Q2. Full-year cash generation goals were on track.

Macro Data Still Muddy

Economically, the latest month’s data was just another in a long line of ebbs and flows at the macro level.

The most recent report on jobs was mostly positive. The economy added 187,000 jobs in July MoM, which was fewer than expected. The previous two months were also revised lower. That is a negative trend on its face. But the hope is that this is a sign the Fed’s interest rate hikes are taking effect and that inflation will continue to soften.

The overall unemployment rate, however, also ticked lower by .1%. This shows that the creation of jobs is still outpacing the number of unemployed and counters the point above. It in addition highlights the high level of uncertainty, which makes forecasting H2’23.

More challenges are ahead. Student loan payments are set to start back up and could be a large blow to consumer spending. Affordability will likely stay lower for longer, which will require a period of adaption for consumers. Consumers have also shifted more and more of their spending to services after goods dominated the recessionary period.

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