Aluminum

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

For off-road cognoscenti, there are few automobiles more iconic than Jaguar Land Rover’s Defender. Since its introduction in 1948, the rugged old workhorse has earned a reputation for go anywhere capability and durability as an article in the FT notes.

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The Defender’s engineering simplicity meant that the car could be repaired in the middle of the desert with the sparsest of resources and spare parts. But that rugged simplicity also led to its downfall. The SUV’s body-on-frame construction meant that it failed to meet modern safety crash tests and the engine just polluted the air too much to meet European emission rules. JLR consequently halted Defender production last year to the anguish of its diehard fans.

Land Rover Defender. Source: Autoexpress

Well, it would seem JLR has aspirations for a comeback. According to the FT, the group expect to relaunch the Defender in 2019 and its design group is working furiously to reconcept a new vehicle that meets modern environmental and safety standards, requiring a complete redesign from the ground up of the old Defender.

Aluminum Everywhere

It would be inconceivable if the new Defender was less capable than the old, a betrayal of that once iconic brand and, by all accounts, JLR has no intention of letting them down. Like the old Defender, a new version will employ considerable use of aluminum in the body, but unlike the old steel chassis will have an entirely new aluminum frame construction. Read more

Speaking at S&P Global Platts’ recent Steel Markets North America conference, noted trade attorney Alan Price of the Washington law firm Wiley Rein said the World Trade Organization case that the federal government filed on behalf of aluminum producers against Chinese overproduction of the light metal in January, will essentially serve as a guide for other industries looking to challenge state-subsidized companies’ overproduction for export in the People’s Republic.

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“The solutions to Chinese overcapacity are to follow the money and see who’s subsidizing it,” said Price, who has represented several U.S. industries in anti-dumping and countervailing duty legal actions against Chinese producers, as well as WTO disputes. “China has not fundamentally reformed its excess capacity. The rest of the world’s production has remained stable, but the explosion in Chinese capacity is still there.”

Alan Price

Alan Price, image courtesy of Wiley Rein

Price said the aluminum case fundamentally attacks the mechanism China uses to back up failing businesses, the availability of subsidized money in China known as “money for metal” on the municipal, state and federal level there.

“The WTO case involving aluminum, challenges, fundamentally, the Chinese subsidization system,” Price said. “It goes after the financial systems of China and how everything is financed. In aluminum you can track all the companies involved. There are around 10 and it’s a much more understandable beast, much more understandable problem than the vastness of the Chinese steel industry. This case will fundamentally decide if China will be allowed to prop up failing businesses.” Read more

If you can’t beat them, then join them? That may be the gist of UC Rusal’s latest proposal for dealing with Chinese aluminum overproduction: an OPEC-like organization for the global aluminum industry.

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In a Reuters article the world’s largest aluminiu producer outside of China was quoted by the TASS news agency at an economic conference in Russia’s Black Sea resort of Sochi as suggesting that Industry ministers should get together and explore ways and means of creating a producers club.

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 trade minister quoted by TASS, Denis Manturov, talked of creating a single policy in the area of standards and technology but, in reality, there would be little to be gained if that was the sole purpose. More attractive to western smelters in general, and Rusal in particular, would be any mechanism that curbed China’s growing dominance of the primary aluminum market.

Rusal was, until a few years ago the world’s largest aluminum producer. In 2016 Rusal produced 3.685 million metric tons, according to Reuters, but China now produces over half the world’s aluminum with Chinese producers overtaking the Russian firm. China’s Hongqiao is now the world’s biggest aluminum producer overtaking Rusal in 2015 and again in 2016. Read more

Our March price trends report, which analyzes the entire month of February’s price data from the MetalMiner IndX, shows robust price increases in metals markets that are still running with the bulls.

March Price Trends

Our Stainless MMI led the pack, increasing 6.8%, but the copper, raw steels, aluminum and rare earths sub-indexes all showed strong gains, as well.

One area of concern this month is that oil prices have fallen back below $50 per barrel as U.S.
shale producers beat expectations by adding 8.2 million barrels to existing reserves. Low oil
prices would benefit metals producers by keeping energy and transportation costs lower, but
they also may drag down other commodities with them.

We don’t usually see investment metals such as platinum and gold increasing at the same time
as base metals, either, but positive sentiment about the economy had both increasing this month. So, until we see anything that points otherwise, a rising tide is still lifting all the (metals) boats.

With aluminum premiums on the rise in the U.S. and Europe, and Japanese inventories falling amid growing demand, producers are upping the ante by charging the Pacific Rim a higher premium for the second quarter in a row.

According to a recent report from Reuters, three global aluminum producers offered buyers in Japan a premium of $135 per metric ton for shipments of the metal in Q2. This would mark an increase of 42% quarter-over-quarter.

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“The producers claimed that the rise mainly reflected higher premiums in the U.S. market, but we think $135 is too high as we don’t feel much supply tightness here,” a source at an end-user told the news source, adding that his company would aim for premiums at around $120-125/mt.

Aluminum Leads the Charge in February

Our own Raul de Frutos wrote this week that of all the industrial metals, aluminum performed the best in February with prices on the London Metal Exchange growing above $1,9000 per metric ton. This marks the first time since May 2015 prices have been this high for the metal.

Wrote de Frutos: “In February, China finally approved its Air Pollution Control regulations, which came into effect on the March 1.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.”

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:

 

The Aluminum Association, the group that represents the North American aluminum production industry, today filed a trade enforcement action against the People’s Republic of China seeking relief for domestic producers of aluminum foil. This action is part of the industry’s broad trade strategy to address Chinese overcapacity throughout the value chain.

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The Aluminum Association’s Trade Enforcement Working Group filed anti-dumping and countervailing duty petitions alleging that dumped and subsidized imports of aluminum foil from China are causing material injury to the domestic industry.

“Today’s action marks the first time the Aluminum Association has filed unfair trade cases on behalf of its members in its nearly 85-year history,” said Heidi Brock, President & CEO of the Aluminum Association. “This unprecedented action reflects both the intensive injury being suffered by U.S. aluminum foil producers and also our commitment to ensuring that trade laws are enforced to create a level playing field for domestic producers.”

The anti-dumping margins alleged by the domestic industry range from 38% to more than 134% of the value of the imported aluminum foil. The domestic industry’s countervailing duty petition alleges that Chinese producers benefit from 27 separate government subsidy programs.

Two-Month Trial: Metal Buying Outlook

The industry group previously said it wanted to avoid filing the trade actions if it could via meetings with its Chinese counterparts but, apparently, there simply was not enough progress in curtailing injurious imports.

Aluminum led industrial metals in February. Prices on the London Metal Exchange rose above $1,900 per metric ton for the first time since May 2015.

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In February, China finally approved its Air Pollution Control regulations, which came into effect on the March 1.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.

Aluminum MMI

The idea was first proposed in January and initially there was skepticism. Markets know that in the aluminum industry it takes time to ramp down and ramp back up production with smelters taking significant losses. This time, China is committed to enforcing the new law and it will prevent local authorities from protecting local smelters.

Capacity Crunch

Some 40% of China’s total capacity is potentially affected and analysts estimate that a 1.3 million mt of output will be lost. However, this figure could be larger since the new law will also impact the supply of raw materials such as alumina and carbon anode plants. Other industry analysts see a loss of 3 mmt of aluminum capacity.

The previous years of supply surplus might provide some cushion against the sort of disruption planned by Beijing. However, this potential supply shock is unprecedented in the aluminum industry and could translate into a complete game changer in terms of aluminum’s fundamentals.

Chinese citizens have previously protested about pollution issues, but tensions are getting much worse. In February, more than 200 people chanted and held banners outside the Daqing city government headquarters to protest against a new aluminum plant. Although the plant would produce more than 30,000 jobs to locals, they now prioritize pollution reduction over employment. As we’ve warned in previous reports, it’s hard to put a limit to aluminum’s price potential as smog moves to the top of Beijing’s policy agenda.

Midwest Premiums Hit $0.1/Pound

Midwest premiums rise to $0.1/pound. Source: MetalMiner IndX.

Midwest premiums continued to climb in February, hitting an almost three-year high. As we warned last month, in addition to higher aluminum prices due to supply cuts, we could see higher aluminum premiums this year due to ongoing trade tensions, just as we saw the spread between domestic and international steel prices widen.

The U.S. experienced a sharp contraction in aluminum smelting capacity over the past year. This has created a case of supply shortfall within the U.S., which now depends on aluminum imports to satisfy its rising domestic demand.

Two-Month Trial: Metal Buying Outlook

This year, the U.S. launched a formal complaint against the Chinese government with the World Trade Organization over subsidies it says Beijing provides to the country’s vast aluminum industry. The fight against imports is getting more serious and this is something that could support domestic aluminum premiums this year.

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U.S. construction spending unexpectedly fell in January as the biggest drop in public outlays since 2002 offset gains in investment in private projects, pointing to moderate economic growth in the first quarter.

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The Commerce Department said on Wednesday that construction spending declined 1% to $1.18 trillion. Construction spending in December was revised to show a 0.1% increase rather than the previously reported 0.2% decline.

Economists polled by Reuters had forecast construction spending gaining 0.6% in January rather than the loss that was booked.

Construction MMI

Our Construction MMI held steady this month despite the falling spending. The component metals of the sub-index still have bulls behind them, despite the flat performance. Steel construction materials such as rebar and h-beams are still posting big gains but scrap and others saw a loss.

It’s almost as if construction products are still in demand, particularly in China’s construction sector, even as U.S. construction experiences a pullback.

In January, public construction spending in the U.S. tumbled 5%, the largest drop since March 2002. That followed a 1.4% decline in December. Public construction spending has now decreased for three straight months.

Outlays on state and local government construction projects dropped 4.8%, also the biggest drop since March 2002. This could be an ominous sign for construction spending this year, provided, of course, that a major infrastructure plan, such as the $1 trillion plan President Trump continues to promise, doesn’t pass quickly enough to boost construction prices. The longer that it takes to pass an infrastructure plan, the less likely it is to boost contractors’ bottom lines this year.

Two-Month Trial: Metal Buying Outlook

That boost is needed for our aging infrastructure, too. Spending on state and local government construction projects has now dropped for three straight months. Federal government construction spending plummeted 7.4% in January, the largest decline since May 2014. The drop snapped three consecutive months of gains.

Spending on private construction projects actually rose 0.2% in January, but could not make up for the loses in government projects.

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We should not underestimate the effect environmental issues are having on policy in China. For the last 20 years, the West has watched the growing industrialization in China achieved at the cost of massive environmental pollution.

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Western firms have been forced to adhere to ever stricter environmental standards while steel, aluminum, cement and a host of other heavy industries in China, India and the developing world had been allowed to avoid or have flouted environmental standards saving them costs and hence allowed them to outcompete western firms. Read more