Aluminium Trends 2017
Aluminium: Demand Grows Strongly Despite a Difficult Geopolitical Environment
Dr. Heinz Jürgen Büchner, Managing Director Industrials, Automotive & Services
IKB Deutsche Industriebank AG
The world-wide need for aluminium is uncontested. Despite the current difficult geopolitical environment, mid- and long-term growth prospects continue. The impetus generators are once more the Emerging Markets. In addition, the IKB Deutsche Industriebank predicts improved prospects for aluminium materials in the leading industrial nations.
Geopolitical crisis produces strain
Some geopolitical crises put strain on the current global economic situation. In the Near East, in particular, tensions might not calm down soon. It still appears that there is no solution for the Syria conflict in sight. Also, in Iraq the situation continues to be unstable, as in a few other countries. A key factor might be further developments in Iran. Hopes by its population for cessation of sanctions were only partially fulfilled. It is still unclear whether moderate forces will continue to govern the country after the elections in 2017. That will depend at a minimum on whether crude oil production can expand and thereby improve the income prospects of the country.
Brexit has dampened the mood in Europe and could, however, affect the British economy most strongly. Foreign trade relations between Great Britain and the European Union are substantial (Diagram 1). Since 2008, British exports have risen by approximately one-sixth. This was primarily due to third-country exports, while exports into the European Union declined slightly over the same period. Imports increased during that timeframe by about 16 %, with the majority still coming from the European Union. Approximately 15 % came from Germany. Great Britain lists a foreign trade deficit balance of approximately 86 billion pounds in relation to the European Union, but only 20 billion pounds involving third countries. The international financial markets assume that the United Kingdom is the big loser of Brexit. The exchange rate of the British pound was punished compared to all other important currencies.
Diagram 1a: British Exports
Future developments in Turkey cannot be evaluated yet. A breakdown of foreign direct investment and weaker economic performance might occur, particularly in 2016 and 2017, with a strong decrease of tourist numbers also a contributing factor. In recent years Turkey has become an important manufacturer, e.g. for aluminium rims. Temporary investment restraint is expected.
Diagramm 1b: British Imports
The Chinese economy will grow on average “only” by approximately 5 % in the medium-term, after about 6.5 % advance in 2016. China will continue its ascent to a leading economic nation. A catch-up process in India might also continue, where average growth rates during 2016 to 2018 of approximately 7 % are expected. Overall, India will not be able to match China until the end of the current decade.
The IKB sees restrained development in Russia, whose economy is negatively affected by low prices for oil and gas, which make up roughly two thirds of the Russian export revenue. The Russian primary aluminium production has recovered to some degree. Sanctions by western industrial nations in the course of the Ukraine conflict, however, led to an investment halt in important segments of the Russian economy, which inhibited its economic power.
Latin America, primarily Brazil, suffers from domestic conflict, social unrest and economic strains caused by the Soccer World Cup and Olympics.
For Europe as well as the USA, the current low oil price creates a stimulus for private consumption. The crude oil price for 2017 is expected to be higher – $12 per barrel on average – compared to 2016, but even this improvement would still be low in comparison to the losses of the last 5 years. Stimulation of oil consumption indirectly generates growth in the demand for aluminium.
Automobile industry: Aluminium use rises
The automobile industry is an important source of demand stimulus for the aluminium industry. Rising requirements for energy efficiency and stricter emissions standards over the next two decades will accelerate the trend toward lightweight construction. The big loser in this shift to lighter materials is conventional steel. In the future, conventional steel will account for only one-fifth of the total material use in auto body production, with high-strength steel taking another 20 %. Plastics and composites (including carbon fibres) also make up one-fifth, while aluminium and magnesium might gain substantially and reach 40 %.
The IKB expects that world-wide production of lightweight vehicles, including passenger cars and small up to 2,8 tonne transporters, will rise in the year 2022 to approximately 106 million units (Diagram 2). A majority of the expansion of capacity will take place in Asia. Between 2018 and 2020, China might exceed the production threshold of 30 million lightweight vehicles for the first time. On the other hand, Japan and South Korea are the only regions that might experience an absolute decline in production. Both countries will lose volume directly to China. In the remaining Asian countries, the IKB expects strong increases. Besides India, in the medium-term Vietnam, Thailand and Indonesia might also gain importance. In particular, Indonesia - apart from Jakarta and the vacation island Bali – has very low automobile density. Moreover, its abundant mineral resources also suggest good potential for an efficient automotive supply industry.
North America will benefit from foreign OEM investments in the region, with Mexico playing an ever more significant role. On the other hand, Latin America will not experience a good start. The passenger car production figures today, e.g. in Brazil, are clearly below the prognosis expected some years ago.
Within Europe, Germany will increase its market share in the medium-term despite the Volkswagen diesel emissions scandal. However, in the next five years, foreign manufacturing by German OEMs should grow more strongly than domestic production. Eastern European production will also benefit from European and international OEM stimulation.
The IKB forecasts that the average use of aluminium in lightweight vehicles will increase to as much as 180 kg by 2020. At the same time, production will increase over the same period by approximately 11 million vehicles. These two effects alone will cause a rise in total consumption of aluminium by the global automobile industry of nearly 4 million tonnes. A portion of this additional amount is allotted to casting products. Increasingly, structural components may also be manufactured by aluminium casting.
Further incentives might result from expected changes in vehicle propulsion technology. Very optimistic prognoses of the international energy agency IEA, for instance, see large increases in plug-in hybrid vehicles (PHEV) and pure electric drives (EV). However, the majority of the shift in product-mix occurs only after 2025 (Table).
At the same time, the market for truck and other heavy commercial motor vehicles will grow to over 3,6 million units by 2022 (Diagram 3). Stricter emissions regulations in the European Union and the USA will also lead to reduced fuel consumption. This will induce investments in a new generation of commercial motor vehicles. Up to now, diesel fuel has dominated in trucks, buses and other commercial vehicles. Within the next 25 years, different kinds of electric drives and alternative fuel types will gain market share, particularly for small transporters and buses. Very large opportunities exist in the heavy load transport segment, e.g. for LNG (liquid natural gas). In an optimistic scenario for alternative drives, only half of the entire energy demand in the future belongs to diesels.
Diagram 3: Produktion of Medium and Heavy Load Vehicals in 1000s
Aluminium profits from urbanisation
The building industry also generates stimuli. The number of construction starts in the USA is going up. The Asian market has especially pent-up demand. Today approximately half of the Chinese population still lives in rural regions. By comparison, in Germany about 80 % live in cities (Diagram 4). During the next ten years, further migration into urban regions is expected in Asia. This will generate subsequent construction demand.
Diagram 4: Portion of Urban Population
The building sector in the European Union might also recover. The Spanish building market has even registered a slight improvement after years of decline and stagnation. However, it might not return to its earlier level for the next 10 years. The Eastern European EU members will show clearly stronger growth compared to Western European countries. Home building shows growth, particularly in Germany, where pent-up demand has risen in centres of dense development. The current continuation of low construction interest rates also stimulates residential construction.
Additionally, demand for aircraft construction will rise. Here too, aluminium will be a substitute for different materials. In the next 20 years, Airbus and Boeing agree on the prospects for production of approximately 31.000 to 32.000 passenger aircraft and a rise in cargo fleets and military aircraft (including drones).
Mechanical engineering and electro-technology-related stimuli will also cause a rise in demand for aluminium. In the packaging sector, increasing urbanisation, a trend towards convenience products, and smaller household sizes will compensate for market share losses to plastics.
Aluminium casting gains from material substitutions
International aluminium foundries will profit from growth in automobile production. However, the benefit differs regionally. China will play the dominant role. In 2015, for the first time, over 6 million tonnes of aluminium casting were produced in China. By 2022, the IKB expects a world-wide rise to over 18 million tonnes of aluminium casting (Diagram 5). Approximately 10 million tonnes are cast in Asia, of which Chinese casting will account for about 6,5 million tonnes.
In 2022, more than 3,1 million tonnes of aluminium casting products will come from Western Europe. Germany will account for 1,25 million tonnes and a further 0,85 million tonnes will come from Italy. In addition, Eastern Europe should recover after an end of the Ukraine crisis. Strong recovery of aluminium casting production in Turkey is also expected.
Aluminium output in the NAFTA region will be equivalent to that of Western Europe. USA OEMs (Ford, GM) will also rely more on aluminium.
Diagram 5: Worldwide Aluminium Cast Produktion
China and the rest of Asia: the primary aluminium production centre
In view of positive demand profiles for aluminium, one might ask: where will production take place? China grew considerably in global aluminium production over the last 15 years. Primary aluminium mill production expanded from only 4,3 million tonnes in 2002 to almost 31,7 million tonnes in 2015 (Diagram 6).
The Gulf region has also gained prominence. From approximately 2,7 million tonnes of aluminium in 2010, production increased to over 5,1 million tonnes by 2015. The region benefits from low energy costs. Production takes place in part with use of otherwise “flared” gas. In addition, both the European and Asian markets can be served very well logistically. However, for 2016 only a small growth rate of primary aluminium production is expected in the Gulf region. In the first three quarters of 2016 the increase was only about 1,2 %.
Diagram 6: Primary Aluminium Produktion
World-wide, primary aluminium production nearly doubled between 2002 and 2015. For 2016, the IKB more or less expects a lateral shift. A strong decline is expected, in particular, in North America. By the end of September 2016, the reduction was already almost 10 %. More closures of primary aluminium mills in the USA are anticipated, so that by 2017 probably only four will remain in operation.
China also announced a shutdown of older mills; however newer electrolysis plants still have considerable free capacity. This means that China will be able to exert pressure on prices for primary aluminium. As with steel production, Chinese providers often receive (in-)direct export subsidies that are not really compatible with free competition.
In contrast to this, production of recycled aluminium gained only slightly. It only expanded from around 8 million to about 10,3 million tonnes in 2014. With fewer shutdowns, Europe has maintained its production volume and America was able to expand its capacity considerably. China now contributes approximately 2 million tonnes to global recycled aluminium production.
In the medium-term, Europe will substantially improve its future prospects in recycled aluminium production due to recycling’s lower specific energy consumption – only 5 % that of primary aluminium – as well as good scrap iron availability compared, for instance, with China. Consequently, correspondingly large investments have taken place in Germany, e.g. in Nachterstedt, Bernburg and Neuss. In other regions of the world additional new large-scale projects have been announced. In the medium-term, this might shift the mix between primary and recycled aluminium more towards aluminium recycling.
Aluminium consumption gains considerably
World-wide consumption of aluminium (primary and recycled aluminium combined) increased between 2004 and 2014 by over 50 %. According to initial estimates, a further rise of approximately 3.5 % took place in 2015. By 2020, global consumption may grow to around 69 million tonnes (Diagram 7). While China currently produces over 50 % of global primary aluminium, its portion of consumption still constitutes less than half.
Diagram 7: Total Aluminium Consumption
Particularly in North America, and primarily in the USA as well as Europe, recycled aluminium accounts for larger portions of aluminium consumption. Beyond that, both continents are also dependent on imports of primary aluminium from other regions.
Overall, very good prospects exist for aluminium materials. The growing demands, especially of the automobile industry, will mainly be satisfied by rising Asian production of primary aluminium, whereas Europe’s opportunities are in the recycling arena.