Aluminum

The Commerce Department launched an investigation on Wednesday to determine whether a flood of aluminum imports from China and elsewhere was compromising U.S. national security, a step that could lead to broad import restrictions on the lightweight metal.

Commerce Secretary Wilbur Ross said the investigation is similar to one announced last week for steel imports into the U.S., invoking Section 232 of the Trade Expansion Act of 1962.

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“Here’s why we did it,” Ross told reporters, “Imports have been flooding into the aluminum industry and the defense angle is that high-purity aluminum is used in the F-35” as well as other military aircraft and vehicles. In the event of a war, domestic manufacturers might be unable to meet the Pentagon’s needs, Ross said.

The investigation mirrors a probe Commerce launched a week earlier focusing on the steel industry, also invoking section 232 of the act. North American aluminum trade groups have been pushing for such action for the last five years.

Philadelphia Energy Solutions Inc., the largest refiner on the U.S. East Coast, will not be taking any rail deliveries of North Dakota’s Bakken crude oil in June, a source familiar with delivery schedules told Reuters on Tuesday, a sign that the impending start of the Dakota Access Pipeline is upending trade flows.

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At its peak, PES would have routinely taken about three miles’ worth of trains filled with Bakken oil each day. But after the $3.8 billion Dakota Access Pipeline begins interstate crude oil delivery on May 14, it will be more lucrative for producers to transport oil to refineries in the U.S. Gulf Coast.

Alcoa Moves Headquarters Back to Pittsburgh

Alcoa Corp. announced today that the company’s expansive Pittsburgh, Pa., office will soon serve as its global headquarters again, a decade after its predecessor, Alcoa Inc., left for New York City.

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Alcoa said in a statement that its headquarters in New York would be one of seven offices in the U.S., Europe and Asia that would shut in the next 18 months in a cost-cutting initiative. Alcoa had kept its offices in Pittsburgh’s North Shore even after it moved the headquarters to Manhattan, with the bulk of its administrative functions remaining in Pittsburgh. Now, the Pittsburgh presence will once again serve as the company’s international headquarters.

The rising trend of aluminum processors seeking protection from Chinese imports may be just the beginning if a recent Reuters article is correct.

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Encouraged by a growing delta between the London Metal Exchange and Shanghai Futures Exchange aluminum price quotations, China’s aluminum makers are expected to step up exports in coming months, aided and abetted by a healthier global manufacturing climate and declining world aluminum stockpiles, the article explains.

Should this prove right, higher exports of semi-manufactured aluminum products would depress prices on both the LME and processors conversion premiums in the rest of the world. That would be bad news for producers, but good news for consumers who have been experiencing rising prices of both the underlying LME and conversion premiums for the last six months.

Chinese exports of semi-finished aluminum products fell last year as both LME and SHFE prices collapsed but production has rebounded more than 20% during the first two months of this year as the rising LME has made exports more profitable for Chinese producers benefiting from a relatively weaker SHFE domestic price. According to Goldman Sachs, the profitability of China’s semis exports has jumped 20% this year, encouraging the surge in exports we have seen in Q1 and portending a further increase in the months ahead.

How long the increase in exports is likely to last, and therefore how persistent the negative impact it will have on prices, remains to be seen. Despite the anticipation of rising exports, many still think the surge could be short-lived. Last month, Beijing ordered aluminum producers in 28 cities to slash output by 30% during winter months to limit coal use and curb pollution. In the mean-time, those producers are pumping out every ton they can adding to domestic availability, inventories and depressing the SHFE price. Come autumn, however, if cutbacks are enforced and the physical market tightens that surplus could turn to deficit and prices could rise. In which case exports will become less attractive and the tap will be turned off.

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This isn’t the first time the global aluminum market will be dancing to China’s tune. Consumers could do well to use a dip in prices this summer to cover forward for what may be a winter in which prices rebound.

It could be argued that Donald Trump’s arrival in the White House has come at the perfect time for the U.S.A.’s number two defense contractor, Boeing. If for no other reason than his assault during the election on the cost of Lockheed Martin’s F-35 program created an opening for Boeing to put a lower-cost alternative back on the table.

Lockheed Martin’s F-35C won’t be ready in time, enter Boeing and an F/A-18 Super Hornet upgrade. Source: Adobe Stock/Spacekris.

At the same time, the U.S. military, particularly the Navy, are facing a bit of a problem with their older F/A–18 Super Hornets. As an article in Sea Power magazine notes, after 16 years of nearly constant combat in Afghanistan, Iraq and Syria the F/A–18 Super Hornet is in danger of exceeding it’s 6,000 hours of operational life way before it had been expected in the next decade.

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Meanwhile, the Navy variant of the F-35, the F-35C is still a long way from being finished and ready for service. Largely because of the compromises Lockheed Martin has had to incorporate into the F-35 program for the Marine Corps’ F-35B vertical-landing jet, the program is way over budget, running late and, still, according to Bloomberg has major operational capability shortcomings to overcome. Read more

Liquid metal

The Chinese aluminum industry has been able to cut costs by essentially selling liquid metal to nearby product manufacturers. Source: Adobe Stock/Kybele.

The head of aluminum for Rio Tinto Group is making a bold prediction: prices for the metal are heading for an “extremely” volatile crossroads.

According to a recent report from Bloomberg, Alfredo Barrios cites uncertainty with the timing of China curbing production, which will further serve to keep investors on the edge of their seats.

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“That’s really where the uncertainty is at the moment,” Barrios told Bloomberg in an interview at their Toronto office. “There’s no doubt that if you look at the supply side, if you look at the environmental issues, sooner or later that will change. But when is a question mark.”

China continues its fight against pollution by ordering to reduce steel and aluminum output in more than two dozen northern cities.

Aluminum Price Impacted by Overcapacity, High Inventory

Barrios added that overcapacity and high inventory could impact aluminum price increases in the near future.

“There’s a number of factors which will dampen any price increase if it goes too far,” he told the news source. “If you look at what are the fundamental reasons behind why prices are where they are, and how different they are from a year ago, it’s sometimes very difficult to see what has made aluminum be higher at all. What’s changed so radically in the last year?”

How will aluminum and base metals fare in 2017? You can find a more in-depth copper price forecast and outlook in our brand new Monthly Metal Buying Outlook report. For a short- and long-term buying strategy with specific price thresholds:

Our Aluminum MMI rose again in March. London Metal Exchange prices rose above $1,950 per metric ton and, given the bullish sentiment among investors, aluminum might soon reach the $2,000/mt milestone.

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Prices were buoyed by confidence that China will implement their agreed-upon cuts. The world’s largest nation-producer of the metal will force about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi to be shut down over the winter season, which runs from the middle of November through the middle of March, putting at risk about 1.3 million mt of production.

Aluminum MMI

It would be normal to see these producers to simply ramp up production ahead of the winter season to make up for lower output during the winter months. However, that won’t be the case.

China’s environmental crackdown is already affecting producers as inspection teams visit aluminum smelters on a regular basis to keep production in check. We suspect that China’s strategy to curb pollution will offer further support to prices.

Global Political Heat

While China tackles overcapacity in the form of an environmental clampdown, international pressure on China is rising. In March, global aluminum associations released a joint letter in advance of the upcoming G20 summit calling for the creation of a Global Forum to address aluminum overcapacity.

This is the first time that a global coalition of aluminum producers has called for such an effort to address Chinese overcapacity in the marketplace. In addition, earlier last month, The Aluminum Association (a trade organization that represents North American producers) filed a petition seeking anti-dumping duties on aluminum foil.

China Hongqiao in Trouble

The world’s biggest aluminum smelter was recently suspended from the Hong Kong Stock Exchange as the company is being forced to defend itself against allegations that it has inflated its profit.

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As my colleague Stuart Burns explains, part of the problem seems to be how China Hongqiao has been reporting its profits and handling internal transfer pricing. Like many of the new breed of Chinese aluminum producers, China Hongqiao has captive power production but, since 2010, the firms profit margins have diverged from most of its peers, maintaining in excess of an 8% margin even when many of its domestic competitors fell into periods of loss.

Even during periods when the coal price rose the reported cost of power produced by China Hongqiao dropped suggesting the firm was trapping profits in the smelting division while hiding losses in power generation. Likewise it has been suggested that China Hongqiao has declared transfer prices from its alumina production division roughly 20% below those of similar companies operating in the same provinces.

Ernst & Young will announce the results of the audit next month. Not just investors but the whole aluminum industry will be keen for a a peek behind-the-scenes into the sometimes murky world of Chinese aluminum producers. Proof of bad reporting would add more tensions to the global aluminum market.

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U.S. automakers’ sales figures for March came in below market expectations and gave early evidence that America’s long boom cycle for automotive sales may finally be losing steam. Automakers sold 1.56 million new cars and trucks in March, a 1.6% decline compared with the same month a year ago.

Ford Motor Company took the biggest hit among sales drops, seeing its March numbers fall more than 7% from February’s.

Industry consultant Autodata put industry Seasonally Adjusted Annual Rate at 16.62 million cars, trucks and SUVs for March.

That was below the 17.3 million analysts polled by Reuters had expected, and the first time since August that the SAAR – a crucial industry metric – had fallen below 17 million.

General Motors had the best month, reporting a 2% increase in sales to just over 256,000 vehicles, with sales of its Tahoe and Suburban SUV models seeing their best sales month since 2008.

Sales at Ford Motor Co. fell the aforementioned 7+% to 236,000 vehicles, with fleet sales to rental agencies, businesses and government entities down nearly 17% on the year. Sales of Ford’s F-Series pickup trucks rose 10% but that simply could not offset the losses elsewhere. Sales at Fiat-Chrysler Automobiles fell 5% in March. Automotive sales in the U.S. risen since end of the 2008 recession and hit a record last year of 17.55 million last year. Toyota Motor Corp. and Honda Motor Co. reported smaller losses.

The fall in new car sales is even more curious considering that consumer confidence is at its highest level since 2000. Could the level of vehicle replacement that had driven sales since 2008 finally be falling? Vehicle inventories at dealerships have risen to the highest point since 2004, according to Edmunds.com.

If auto sales have, indeed, plateaued, then prices for automotive steel and aluminum could as well, at least in the expansive U.S. market. Our Automotive MMI remained flat this month at 88.

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Commodities and industrial metals have always moved in tandem. However, things have changed over the past few months. Industrial metals continue to rise in price while commodity indexes struggle to hit new ground.

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What’s up with that?

CRB commodity index (in orange) vs DBB industrial metals index (in black). Source: MetalMiner analysis of @Stockcharts.com data.

Two things have caused industrial metals to outperform the rest of commodity groups (agriculture, energy, etc) this year:

First, in November industrial metals got a boost as Donald Trump won the U.S. presidential election and his republican party kept control of both houses of the Congress. Investors now hope that a Trump-led GOP government will boost domestic infrastructure, which could be a boon for industrial metals demand. In addition, the new president has stated he is willing to institute more measures to protect domestic producers.

China’s Pollution Performance

Second, and more importantly in my opinion, Industrial metals have been benefiting from a tailwind since January when China’s pollution problems got worse and authorities asked 23 cities in northern China to issue red alerts as inspection teams scoured the country. Steel and aluminum are leading this year’s rally. This is because these two are the most energy-intensive metals and China has shown a commitment to cut output. Read more

Aluminum prices have risen around 15% since the beginning of the year.

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The metal is currently trading at a two-year high, just below $1,950 per metric ton. A slow but steady rise.

The aluminum 3003-H14 Sheet price. Source: MetalMiner Price Benchmark.

This year’s rally comes as markets tries to price in Chinese anti-pollution capacity cuts next winter. The world’s largest nation-producer of the metal will force about a third of aluminum capacity in the provinces of Shandong, Henan, Hebei and Shanxi to be shut down over the winter season, which runs from the middle of November through the middle of March, putting at risk about 1.3 million mt of production. Read more

Following the fortunes of Boeing and Airbus, you could be forgiven for thinking that aircraft manufacturers always run late, over budget, and the resulting end product can struggle to meet initial expectations.

Emrbaer E2

The Embraer E2. Source: Embraer.

But Brazil’s Embraer, the world’s third-largest commercial jet maker, has shown with its next generation narrow body regional aircraft, the E-2 series, that it doesn’t have to be that way. Embraer introduced the aircraft at the Paris Airshow in 2013 and it was first displayed last summer at the Farnborough Airshow just 45 days after its maiden flight. The aircraft is set to be delivered on time, on budget, and even slightly underweight.

Segment Dominance

Embraer has been very successful with their current E-jet series and the new E-2 program looks set to maintain the company’s 55% market share dominance of the regional jet market. The E-2 will commence deliveries in the first half of 2018 and variants will be capable of carrying between 70 and 130 passengers. An FT article notes that Embraer has a backlog of commitments from airlines for 690 E2 aircraft, including firm orders of 275.

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The company has struck a wide-ranging and exclusive arrangement with Alcoa Corp. for aluminum sheet and plate for the wings, skins and fuselages of the model, with other Alcoa products being used in key applications such as wing ribs, fuselage frames and other structural parts. The long-term collaboration is said by Aluminum Today to be worth $470 million to Alcoa. “PurePower” engines will be supplied by Pratt & Whitney. Read more