By Henry Lachman Jul 21, 2011
Alcoa's strong earnings highlight the growing need for lighter metals in aircraft and automobile manufacturing, particularly in China.
Pittsburgh-based Alcoa (AA), the largest domestic producer of aluminum, saw its Q2 profit increase more than 100% “after higher prices for the lightweight metal outweighed increasing raw-material costs,” according to a Bloomberg article. Alcoa’s sales increased 27% to $6.59 billion last quarter, driven by 24% price increases on the London Metal Exchange and skyrocketing global demand, especially in the aerospace and transportation sectors.
Alcoa was not the only aluminum company posting massive profits. Gerhard Halch, the head of Amag, told Reuters that “demand for aluminum will double within the next 10 to 12 years, so a global growth rate of 7 percent. This is a nice picture. Demand for… products has put the company on target to match or beat 2010’s record year for earnings.”
Commodities Now also predicts a doubling of aluminum demand in the next decade, including a 9.1 percent increase in aluminum demand from aircraft, an 8 percent increase from transportation, and 5.6 percent from engineering and construction. Part of this comes from higher aluminum content in vehicles, as demand for more fuel efficiency drives manufacturers towards lighter metals. Additionally, China’s 12th 5-year plan calls for a 55% increase in spending on rail infrastructure, which involves restarting 1.1 million tons of aluminum capacity a year before becoming a net primary importer in 2014. Several aluminum companies have landed major deals within these sectors. Last month, Alcoa finalized a multi-year deal with Airbus worth approximately $1 billion for sheet and plate products of advanced aluminum alloys. Also, the Aluminum Corporation of China (ACH) and Sapa Group have made a joint agreement to produce 20,000 tons of aluminum yearly for Chinese rail transit projects.
China’s aluminum production rose 3.6% in June, setting a record for the fourth consecutive month and reaching a 13.3% increase from a year ago. Even with surging production -- “as much as 1.5 Mt/year of new production capacity is due to come online in June and July,” according to a report by VM group -- VM Group and ABN AMRO Bank “adjusted down [the] aluminum market surplus to 0.36 Mt in 2011, from 0.66 Mt, due to impressive global demand growth” in the June issue of Metals Monthly, indicating that demand will probably keep ahead of rising supply.
Despite these increases in both production and demand, trade magazine Metals Monthly reported that “Aluminum shipments by North American service centers slid 11% to 137,900 tons in April from 155,000 tons in the previous month.” Production is cheaper elsewhere -- power accounts for more than one third of costs. This, combined with high inventories already in the supply chain, justifies not restarting American smelters. (Seemingly in response to this, anti-dumping margins of between 32.8% and 33.3% and countervailing duties of between 8.0% and 374.2% were formally issued by the U.S. Department of Commerce on certain aluminum extrusions from China.)
Right now, the market is expanding rapidly. Barring a crash in demand like in 2008, aluminum usage should keep ahead of the massive supplies.