Expectations melt in aluminum market. (Non Ferrous).

Several months ago at the ISRI Annual Convention, aluminum industry researcher James Southwood remarked that the shut down of smelters in America's northwest would play a role in strengthening aluminum prices.

In his worse case scenario, the reduced capacity would at least help keep prices flat against eroding demand. Unfortunately, the second half of 2001 seems to be playing out that worst-case scenario, with the lost capacity hardly missed by an industrial market with a shriveling demand for aluminum.

Southwood, of Commodities Metal Management Co., Pittsburgh, gave another forecast to attendees of the ISRI Commodity Roundtables, held in Chicago in mid-October.

He noted that 1.6 million tons of annual capacity has indeed gone offline in the U.S. northwest, while a second dry rainy season could shut down more plants in Brazil if hydroelectric prices skyrocket as a result of the drought. But the real story in 2001 is dramatic decline in demand, said Southwood. Demand in the U.S. for primary and secondary aluminum, rather than rising a projected 2 percent in 2001, has instead fallen, with September 2001 demand off 11 percent from 12 months before.

In short, "demand has been declining even faster than smelting capacity," says Southwood. And while the rest of the world has maintained stable demand this year, there are concerns that the global economy will follow suit in the wake of uncertainties caused by the Sept. 11 terrorist attacks and the resulting conflict.

The lack of activity has been felt by the scrap industry both in terms of price and volume. One Midwest secondary alloy and ingot maker reportedly has an unprecedented inventory of unsold ingots piling up in the wake of the lackluster demand.

Southwood again unveiled several scenarios, with the differences predicated in part on American consumers' reaction to the September 11 attacks and recession worries. In the short term, bearishness could drive LME aluminum prices down another $200 per ton, he predicted, but in the long-term, rampant pessimism and short-selling could be met with a "whipsaw" effect if some positive economic news shows that the market over-reacted to bad news.

A similar scenario occurred in 1987, says Southwood, when metal traders reacted to the stock market crash as if it was the predecessor to a dire recession, when in fact the overall economy (and demand for consumer goods) was not severely affected by what occurred on Wall Street.

Also at the Aluminum Roundtable session, Mike Spear of Samuels Recycling Co., Madison, Wisc., remarked that the reduced melting taking place in the U.S. has resulted in his company sending a higher percentage of material overseas.

Spear said the decrease in auto production has been noticed by the aluminum scrap industry, as 40 percent of the aluminum used by manufacturers now goes into the transportation segment. A ray of hope along those lines, the recycler noted, is that automakers are now using increased amounts of aluminum in the light truck sector as well.

Spear added that "something will have to happen in the global economy that is positive" for demand to pick up, and forecast that the aluminum scrap industry is "likely to stay in a low supply, low demand mode" for the next six months.

Ed Cowan, of Beck Aluminum, Cleveland, noted that LME-indexed aluminum has traded at a very narrow range in 2001, and that margins have virtually disappeared for secondary smelters, while the bankruptcy of customers is another danger facing the industry. "An alloy producer can die slowly if it charges a penny low on ingot prices, or pay a penny high on scrap prices. Or it can die quickly if a major customer doesn't pay," he stated.

2002 could bring more gloom to the market, Cowan predicted. "I think volume is going to drop dramatically. I think things in the overall economy are worse than people realize," he stated, adding that he sees more "rationalization" among aluminum smelters and casters.