Aluminium

Aluminium: thriving in the new normal

Aluminium industry is today facing key questions

Market uncertainty caused by the Covid-19 pandemic, the high number of developed countries, and because emerging markets have yet to flatten the curve of the novel coronavirus, is driving the surplus of aluminium stocks in 2020.

Global aluminium consumption in first quarter 2020 fell by 8 per cent; China’s consumption dropped by 10 per cent and the rest of the world by 7 per cent. 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 per cent-10 per cent of the total aluminium 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 aluminium 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 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 aluminium company would adopt. Generally, leading companies hedge 20 per cent-30 per cent 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 2020, which is mainly attributed to the Chinese demand recovery.

 

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 (VAP) 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 aluminium and specialty treatments, which will further add value to customers.

Some examples include producing aluminium 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 segment still has positive momentum: Applications in electric vehicles will still be in demand as many auto original equipment manufacturers (OEMs) slowly shift to electric vehicle platforms. Aluminum 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: 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 aluminium 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.