Don’t be fooled by a firm aluminum price. Producers of downstream products such as flat rolled sheet and plate, and extruded products such as bar, sections and tubular products are still suffering even though margins have improved from the start of the year. According to Metal Bulletin, plate prices have followed the primary price higher and mills have managed to increase margins slightly by maintaining a united front on pricing. Imports have been restrained by the weak dollar but even so material is coming in from Europe and Asia particularly for extrusions where Chinese volumes have increased. Extrusions margins have also improved somewhat but most extruders are probably still losing money as mill capacity utilization is way down. Shipments are some 50% down from the first half of 2008 and mill capacity is running at no more than 60% even though shipments picked up a little in September and again in October. The fear is these are entirely stimulus driven. Anecdotal evidence suggests where there is a blip of activity it is driven by some infrastructure project or in the case of automotive demand by the cash for clunkers program. As the auto and housing sales stimulus programs have come to an end so will the demand from those sectors. Housing stock is still way over the levels necessary to justify significant investment in new builds.
Tom Stundza in Purchasing.com illustrated the impact on the distribution market when he quoted mill shipment and inventory levels in last week’s report. Tom said aluminum mill product shipments for the first 10 months of the year of 986,200 tons are 60.3% lower than the volume of 1.636 million tons during the January-October period last year, re-enforcing the point we made above about the impact on the producers. He then went on to quote presumably from the Metals Activity Report of the Metals Service Center Institute that inventories stood at 257,900 tons at the end of October, a 1.2% rise from September month-end inventories but 40.5% below those of the same time last year. At current shipping rates, aluminum inventories represented a 2.8-month supply. And therein lies the problem. Producers are hoping the supply chain is going to re-stock but in reality the supply chain is well stocked based on current end-user demand. Demand is showing little or no sign of picking up and as we will be writing elsewhere with bank lending continuing to fall and so much deflationary pressure in the economy, a country wide rebound in demand is doubtful. The recent pick up in the last part of the 3rd quarter and early 4th quarter is welcome but is unlikely to continue through to the year end.