Global aluminium industry: Thriving in the new normal

Oversupply poses a major challenge for the aluminium industry in the coming quarters

  
Young engineer man checking production line in wire warehouse Image used for illustrative purpose.

Young engineer man checking production line in wire warehouse Image used for illustrative purpose.

Getty Images/ serts

Market uncertainty caused by the COVID-19 pandemic in a high number of developed countries, and emerging markets yet to flatten the curve is driving a surplus of aluminum stocks in 2020.

Global aluminium consumption in first quarter fell by eight percent; China's consumption dropped by 10 percent and the rest of the world by seven percent. The normal seasonal impact of the Chinese New Year coupled with COVID-19 intensified the decline. By the end of 2020, depending on how quickly the demand bounces back in third and fourth quarters, there could be an anticipated global surplus in the range of 2 million to 7 million tonnes, i.e., roughly 5 percent-10 percent of the total aluminum consumption.

•Beyond the immediate question of "how long" is the more existential question of "what next?"

•What will be the "new normal" and how will this play into new strategic roadmaps of global aluminum majors?

•How can stakeholders navigate through a recessionary period that could last anywhere between two to four quarters, depending on the duration and severity of the pandemic?

Key short-term business initiatives

  • Postpone CAPEX plans for 2020: This ensures higher cash flow and conserves/controls working capital. It also ensures good liquidity and line of credit until the inventories are cleared and London Metal Exchange Index (LME) prices rise. These short-term measures can curtail higher inventory costs due to high uncertainty.
  • Temporary plant closures: This is inevitable due to the need to secure cash by lowering the inventory burden, which is aligned with long-term businesses, such as in automotive and aerospace.
  • Awaiting the opportune time to hedge LME: This is a typical pricing strategy any aluminum company would adopt. Generally, leading companies hedge 20 percent-30 percent of LME based on positive market movements of the LME index. Currently, LME has recovered from an all-time low of $1,421 per tonne as on April 4 to an increase of over 150 $ per tonne in the last two months reaching $1,573 per tonne as on June 16, which is mainly attributed to Chinese demand recovery.

Opportunities for future growth

• Localising raw material requirements by producing them in-house (backward integration): Securing the supply of critical material has been the utmost priority, especially for primary smelters, who rely on key materials other than bauxite, like silicon metal, which is used to produce foundry alloy ingots, calcined petroleum coke, coal and various alloying elements.

• Metamorphosis in the global supply chain: Due to uncertainty in index prices, long-term contracts will take a back seat and spot pricing will be adopted. Many producers are changing their product mix to suit current needs, e.g., shifting value-added products to commodity-grade products based on the current demand uptake; packaging, power, building and construction are the key focus areas in the short term before the supply chain stabilises for other industries like aerospace, automotive, and specialty segments.

• Invest in value-creating growth projects: Many companies have aggressive plans to expand either geographically or within the same country, or a combination of both. It will be important to drive value addition of aluminum and specialty treatments, which will further add value to customers.

Some examples include producing aluminum composite panels instead of only coated sheets; producing billets and extrusions via the recycling route, which has a closed recycling approach and a network of recycling procurement; or producing electronic products with special heat treatments and anodising, which will ensure that the product reaches customers directly, avoiding the route of another anodiser in the value chain.

• The electric vehicles (EV) segment still has positive momentum: Applications in electric vehicles will still be in demand as many auto Original Equipment Manufacturers (OEMs) slowly shift to EV platforms. Aluminium will continue to replace steel in powertrains, and chassis and battery systems will be the new demand drivers.

There could be a slight slowdown due to the recovery and focus on short-term sustainability since EV is a disruption to the entire internal combustion industry ecosystem but the case is still strong.

• Special treatment in food and beverage products - Aluminium foil and UBC (Used Beverage Can): Based on safety norms provided by the health authorities, moving forward, aluminium-packaged products will have additional coatings for the health and safety of consumers, as required by international standards and local government regulations and guidelines.

• Digitalisation and Industry 4.0: New technologies include advanced automation technology and smelter technology. Robotics integrated into aluminium smelters and cast-house operations eliminate the use of human capital while avoiding unsafe material handling.

• Ramp-up recycling initiatives to enable a circular economy: Sustainability is the core of the aluminium business. Investing in recycling should be high on the agenda for any CEO, as this will drive the aluminum industry going forward. Closed-loop recycling is adopted by many global majors.

Building material scrap, including from extrusion, automotive sheets and UBC, is highly involved in this ecosystem. Due to the rise of electric vehicle aluminium content, these initiatives and best practices will be crucial differentiators.

Conclusion: The New Norm in Aluminum Manufacturing:

The author is Principal Consultant, Metals & Minerals Practice, Frost & Sullivan

(Any opinions expressed in this article are the author's own)

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© Thomson Reuters Projects News 2020

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