This classification covers establishments primarily engaged in flat rolling aluminum and aluminum-alloy basic shapes, such as sheet, plate, and foil, including establishments producing welded tube. Also included are establishments primarily producing similar products by continuous casting.
331315 (Aluminum Sheet, Plate, and Foil Manufacturing)
"The aluminum sheet market is like a box of chocolates: you never know what you're gonna get." With due credit to Forrest Gump, David Hamill of American Metal Market aptly described the volatility of this sector in the mid-1990s. In the 1993-96 period alone, the market bottomed out, peaked, and drew back once more. While the gyrations made life interesting for speculators, they were anathema to users who sought stable, predictable pricing. By the late 1990s, the industry had begun to consolidate considerably—most notably with the merger of giants Alcoa and Reynolds. Industry shipments totaled $11.5 billion in 2001, down from $12.8 billion in 2000. The industry remained relatively flat in 2002 with little growth anticipated during 2003.
Over the past several decades, aluminum makers have been successful in developing new products and taking market share from competitors like steel. Much of the industry's gains could be traced to the intrinsic qualities of the metal—aluminum is strong, lightweight, and eminently recyclable, all qualities that were still highly prized in the 1990s. Skilled management and smart marketing, however, had also been significant factors in the industry's advance. Thus it had come to dominate the beverage can market and had established an increasing presence in automobile manufacturing.
While the industry had done an excellent job in spurring demand, the volatility in aluminum markets was causing more than a few users to have second thoughts about the metal. In the important automotive market—and even in cans—some executives were taking another look at steel. Nevertheless, producers remained optimistic that aluminum's physical traits would make it the metal of choice in a growing variety of applications. The economic conditions of the early 2000s were putting pressure on aluminum as oversupply and lack of demand combined to slow the industry's growth.
Aluminum sheet, plate, and foil represent the aluminum industry's major product group and account for the majority of shipments from aluminum producers. Aluminum is first produced in the form of sheet ingot. These ingots, which may weigh as much as 20 tons, are flatrolled and rerolled until the desired thickness, or gauge, is achieved. The gauge determines what product has been produced: plate is a quarter-inch thick or more; sheet is.006 inch to .249 inch; and foil is less than .006 inch. Sheet is by far the most widely used form of aluminum and is found in all of the industry's major markets, including containers and packaging (most notably beverage cans) and transportation (i.e. panels for automobile bodies). Plate is used for the skins of jetliners and to make storage tanks, among other heavy-duty applications. Foil is used, of course, to wrap the Thanksgiving turkey, but is also utilized in building insulation and electrical capacitors, as well as a wide variety of packaging applications.
Vertical integration in the aluminum industry is extensive—it goes well beyond the mining, refining, and smelting of primary aluminum (including sheet ingot, casting ingot, and extrusion billet) to the production of semifabricated and fabricated products downstream, including sheet, plate, and foil offerings. Alcoa, formerly the Aluminum Company of America, has dominated the industry; its scheduled May 2000 merger with other industry leader Reynolds Metals, coupled with the restructuring of the former Tenneco, Inc., will give it a huge presence in the industry. Canadian manufacturer Alcan, however, has launched something of a challenge with planned mergers of its own.
The aluminum industry is relatively young. The first major application, cast cooking utensils, did not appear until the 1890s. Following the turn of the century, however, prices fell, production rose, and applications grew. World War I greatly expanded use of the metal, as armies searched for lightweight, durable materials for military equipment. In the 1920s, high-strength alloys were developed that were used in the development of the commercial airline industry in the 1930s. During World War II aluminum output increased, primarily due to demand from warplane production and soldiers' rations packaging. While consumption dropped briefly right after the war, consumer demand soon picked up the slack. In the early 1950s the Korean War produced another surge in aluminum shipments. As consumer demand grew during the postwar prosperity, the range of applications increased accordingly. Use of aluminum building products in commercial and residential construction expanded, and aluminum foil became a staple of the American kitchen.
The advent of a strong environmental movement gave new prominence to the industry, since aluminum was particularly suited to recycling. To produce aluminum from recycled scrap requires only 5 percent of the energy that it takes to make it from scratch. Since the economics of recycling make so much sense, industry participants have supported the efforts of environmentalists in this area. Moreover, as governments pressure automakers to increase gas mileage of their vehicles and thus save energy, lightweight aluminum is gaining favor among manufacturers in a variety of applications.
Aluminum is a notoriously cyclical business, and after a very strong performance at the end of the 1980s, a few lean years might have been expected. The extent of the downturn, however, was an alarming one for industry participants and well beyond expectations. In the early 1990s the aluminum industry became one of the unintended victims of the Cold War's aftermath. Russia no longer needed much aluminum for its defense sector, but it did hunger for export earnings. Before the fall of the Berlin Wall in 1989, Russia sent about 250,000 metric tons of aluminum overseas each year; by 1993 they were shipping aluminum at an annual rate of 1.2 million metric tons. As Clifford Gaddy, a Brookings Institution economist, told the Wall Street Journal, "We were used to a world in which one of the biggest commodity producers was the most stable and predictable—everything was planned five years ahead with the absolute minimum of surprise. Now it's switched to the exact opposite, where even their own government doesn't know what's happening."
In 1994, however, the industry staged a strong recovery on the back of an improved economy and tighter supply. Overall demand for aluminum sheet increased 11 percent; the transportation sector was particularly strong, with usage in passenger cars up 23 percent. Moreover, under the so-called Memorandum of Understanding, the aluminum-producing nations agreed to shut down 1.5 million to 2.0 million tons of overall capacity. Russia alone cut its production by 500,000 tons a year. As demand grew and supply was restricted, inventories fell, prices strengthened, and profits rose.
In late 1995 and 1996, however, market conditions again took a turn for the worse. Some industry observers traced the weakness to protracted "destocking" by aluminum consumers. Pricing for aluminum ingot on the London Metal Exchange—which has a strong effect on sheet and can stock prices—averaged 68 cents per pound in 1996 versus 82 cents per pound in 1995. According to statistics of the Aluminum Association, sheet, plate, and foil volume fell 4 percent in 1996 to 10.7 billion pounds. At that level, the three products accounted for 59 percent of the industry's total shipments. Demand for sheet fell 5 percent to 9.2 billion pounds; plate was down 16 percent to 0.3 billion pounds; and foil production rose 2 percent to 1.2 billion pounds. The lower level of shipments and weak pricing were reflected in the 1996 pretax profits of the six largest aluminum producers, which fell 36 percent. The industry began to turn around in the late 1990s, although employment figures continued to drop. Consolidation within the industry will probably lead to further restructuring.
The three major markets for aluminum in North America are packaging, building and construction, and transportation. Building and construction in the United States, despite a building boom in the late 1990s, is a mature industry. And while shipments to the beverage industry had been the major factor driving new demand through the early 1990s, in mid-decade they had begun to stagnate. Thus the industry looked to the transportation sector for new markets and continued growth.
Transportation. In the 1990s the aluminum industry invested substantial resources in both research and development and marketing to displace steel as the metal of choice in automobiles, and by mid-decade it had made significant progress toward that goal. According to the Aluminum Association, in 1998 aluminum shipments to North American carmakers was 7.16 billion pounds, accounting for 31 percent of the total market. To provide some perspective, automakers used 2.9 billion pounds of aluminum in 1994, up 386 million pounds from the level of a year earlier. Sheet aluminum accounted for the greatest volume.
The potential for increased aluminum content is substantial. According to one estimate, only 5.8 percent of the typical family vehicle in 1995 consisted of aluminum, versus 67.5 percent for steel and 7.7 percent for plastic. In 1996 the average car had about 247 pounds of aluminum. Estimates of the proportion of aluminum content in passenger vehicles by the end of 2000 vary, but some observers put the figure at 350 to 400 pounds. The large producers are optimistic that aluminum usage in cars will increase steadily.
In the automotive market, as in others, aluminum's advantages are its recyclability (at a time when governments and environmentalists are aiming for a totally recyclable car) and, especially, its light weight (which improves fuel economy). While aluminum is only 35 percent as dense as steel (its specific gravity is 2.7 versus 7.8 for steel), it can be nearly as strong, depending on car assembly methods. The development of higher-strength alloys has increased the attractiveness of aluminum in recent years. Some observers believe that the Japanese auto industry has a particular interest in incorporating aluminum into vehicles because of the high price of gasoline in Japan and the high proportion of imported raw materials. Others believe that the electric car is the most promising market for aluminum, because such automobiles must be light to compensate for the presence of heavy batteries.
One drawback of aluminum, however, is the relatively high cost, which has led some observers to believe that "all-aluminum" cars will continue to be restricted to luxury models. In 1996 there were only two such BIW (body-in-white) aluminum cars: the Honda Acura NSX and the Audi A8, and both were high-priced, low-volume sports cars. The Acura's aluminum BIW weighed 309 pounds, or 40 percent less than what a hypothetical steel model would have cost. But many observers believed that there would not be an affordable, all-aluminum, high-volume car for many years, owing to the more problematic assembly methods and the higher metal making cost. Aluminum requires more energy in spot welding and is less formable in stamping than steel.
Can Sheet Production. In 1963 almost none of the beverage cans were made from aluminum; 35 years later, all beverage cans were aluminum. Shipments of can sheet rose steadily throughout the 1980s and early 1990s, increasing from 2.9 billion bounds in 1982 to 4.3 billion pounds in 1992—24 percent of the aluminum industry's total shipments. Aluminum displaced both glass and bimetal cans partly because of its light weight and stackability. Moreover, in a period that saw rising ecological concern, aluminum's recyclability meant it was environmentally friendly. In 1998, 64 billion aluminum cans were recycled, according to the Aluminum Association.
But perhaps the main selling point for aluminum was its lower overall cost. In 1994, however, as supply contracted and prices rose, beverage makers had sticker shock. In December 1994, Coca-Cola announced that it would replace aluminum with steel in some of its European and Asian markets, and many beverage makers talked of switching to cheaper materials. By 1997, though, there were still no major changeovers. As Norm Nieder, group director of packaging at Anheuser-Busch told Beverage World in 1995, "Outside the United States, steel cans may offer a nice alternative, but they produce higher coating emissions than aluminum cans do. There's no way you could run a steel can plant in California today, for instance, that's for sure."
Anticipating still-higher can sheet prices in 1995, beverage makers stockpiled inventories—soft drink can shipments rose 10.4 percent in 1994—which hurt the market during the mid-1990s. A longer-term trend in the beverage industry has potential repercussions for aluminum producers. So-called New Age drinks have been increasing in popularity, and these have traditionally been sold in glass bottles. While the industry has tried to convert New Age bottlers to aluminum, in 1994 bottlers shied away from marketing their products in 24-ounce aluminum cans because of the high price. Meanwhile, in the beer segment, aluminum makers must contend with the growing popularity of products from microbreweries, which package their beer in bottles.
Moreover, for a variety of reasons, can makers are adopting smaller lid designs and are using thinner aluminum. As a consequence, manufacture of each can requires smaller amounts of aluminum than in past years. Thus, greater unit demand for cans does not necessarily translate into an equal rise in aluminum requirements. Additionally, there appears to be a trend toward the more economical large, plastic bottle as well. Producers had been hopeful that overseas beverage can markets, where aluminum's penetration has on average been much lower than in the United States, would pick up the slack. But with Coca-Cola and other producers shifting at least some of their packaging to steel, these expectations may be dashed.
Aerospace. The aluminum industry has aggressively penetrated the aerospace market; nearly all defense planes have an aluminum content of 70 to 90 percent. Demand for aluminum from the aerospace segment was strong during the 1980s, as both defense spending and commercial aircraft orders were buoyant. By the early 1990s, however, the aerospace segment was in decline. The airlines cancelled or delayed orders as their profits disappeared, and with the Cold War over the government cut outlays for the military. According to Aluminum Association statistics, annual shipments of both heat-treatable sheet and heat-treatable plate, which are primarily used in defense and aerospace applications, fell 23 percent and 19 percent, respectively, between 1989 and 1992.
In early 1994 some industry participants thought a bottoming out had been reached and that this industry niche would recover a bit. By 1996 the commercial jet aircraft market proved to be one of the few bright spots in an otherwise lackluster aluminum picture. Price hikes of 10 to 15 percent in some heat-treated and heat-plated products were announced at the end of the year by Alcoa, Reynolds, and Ravenswood Aluminum.
The aluminum producers continued to maintain a dominant role in the aircraft market despite the attempts of other materials makers to steal share. In the 1980s proponents of nonmetallic advanced composites claimed that by the second half of the 1990s they would account for up to 80 percent of commercial airframe weight. In 1994, those predictions appeared overblown. Aluminum in the newest commercial transport, the Boeing 777, accounted for about 65 percent of total weight, down from previous generations of airliners but nowhere near the 2025 percent level that some pessimistic observers had forecast. The composites have made the most headway in the plane's tail, which in the 777 represents a loss of about 25,000 pounds of aluminum products.
Meanwhile, the industry continued to work on new alloys and new processes. Despite cutbacks in its budget, the Pentagon remained committed to maintaining its technological edge, which encouraged aluminum companies to make new investments in research and development to service the military's needs.
After fluctuating wildly during the 1990s, the aluminum industry looked forward to a period of stability. However, the terrorist attacks of September 11, 2001 threw the U.S. economy, as well as the aluminum industry, into turmoil. Following the terrorist attacks, the economy, which had already shown signs of weakness earlier in the year, ground to a halt. Particularly hard hit were the nation's commercial and industrial sectors. In turn, the demand for aluminum abated, oversupply became an issue, and the industry feared another near collapse.
Of particular importance to the aluminum industry was the dismal outlook for commercial airlines. Richard Aboulafia, director for aviation for the Teal Group, told Aluminum International Today, "The situation before September 11 was worse than the airframe manufacturers admitted, but the terrorist attacks did make it worse. It was supposed to be a painless downturn, but instead we [were] looking at the mid-1990s all over again." As a result, airline companies postponed or outright cancelled many new plane orders.
Despite the downturn in the economy, the aluminum industry has found several bright spots. First, although commercial airplane manufacturing is down, military airplane orders are on the rise. Planes such as the F-16, FA-18, and the C-17 consist of up to 80 percent aluminum. Increased auto sales during the last quarter of 2001 and the first half of 2002 also provided opportunities for the aluminum industry. However, like a boom in new housing starts, spurred by extremely low interest rates, growth of auto sales, as well as new house sales, is expected to slow as pent-up demand is fulfilled and interest rates inch back up.
The commercial and industrial sectors are not forecasted to see significant recovery until at least 2004. And then, the economic turnaround is predicted to be a slow, gradual process. Once commercial and industry activity picks up, aluminum producers should be able to lower inventories, tighten up demand, and stabilize the market for aluminum products.
The largest aluminum producer in the world is Alcoa (Aluminum Co. of America). Indeed, in the early part of the century it was the only aluminum producer of consequence in North America. In 1928 it spun off its foreign operations into Alcan, the large Canadian producer, as it continued to dominate the U.S. market. In 1950 Alcoa's domestic monopoly—which had already been somewhat diluted by the federal government's efforts to create competitors during and following World War II—came to an end as the courts dismantled the company.
In the early 1960s the reconfigured company began to produce more semifabricated and fabricated products as it expanded output of can stock and products for the aerospace industry. In the late 1980s, after the acceptance of diversification earlier in the decade, the company refocused on its aluminum business. Alcoa stresses the importance of safety in its operations, and in the early 1990s had the best safety record of the major producers. In 1996, Alcoa's sales rose 5 percent to $13.1 billion; net profit fell 35 percent to $514 million, primarily due to lower prices for aluminum products. In 2002 sales reached $20.3 billion, and net income fell to $420 million.
Consolidation seems to be the name of the game in the aluminum industry, and Alcoa is leading the way. In the summer of 1998 Alcoa merged with Alumax, another key player in the industry, purchasing some 27.5 million Alumax shares at $50/share. Alumax, which derived about 30 percent of its income from the construction market, had itself acquired extruded aluminum manufacturer Cressona in 1996. A year after the Alumax deal, Alcoa announced plans to acquire the venerable Reynolds Metals Company. This deal, set for completion in May 1999, came in the form of an all-stock bid valued at $4.3 billion dollars. Reynolds Metals Co. has been a leader in developing new aluminum products, from baseball bats to grain bins. It introduced the aluminum beverage can in 1963, when steelmakers had a lock on that market. Reynolds' two-piece can took about one-fifth the time to make and used 40 percent less metal than the three-piece can of its steel rivals, which it quickly displaced. In 1968, the company pioneered the huge can recycling program that gave makers a cheap source of aluminum and was cheered by environmentalists.
Reynolds had the wisdom to stick with its famous aluminum foil when it was a money-loser. It has built on the popularity of its foil by expanding into plastic and paper household packaging products. On the other hand, in the mid-1990s the company was criticized for investing in too many businesses and losing its strategic focus; it was also accused of having a high cost structure. Sales of $3.5 billion in 1996 yielded net income of $89 million, sharply below earnings of $389 million in 1995. In 1999, sales were $7.8 billion and revenues were $124 million. Reynolds accepted a $4.4 billion bid in 2000 and now operates as Reynolds Food Packaging, a subsidiary of Alcoa.
The manufacturing workforce of the major aluminum companies is heavily unionized. The industry's two major unions are the United Steelworkers and the Aluminum, Brick, and Glass Workers. New long-term labor agreements covering unionized workers were ratified in mid-1996. The agreements set broad, new goals for employee safety, job security, influence, control, and accountability for the work environment. Some observers, however, thought labor peace had come at a considerable price. Analyst John C. Tumazos, aluminum analyst at Donaldson, Lufkin & Jenrette, told American Metal Market that they were "more expensive than the national inflation rates and our own expectations." Not surprisingly, given the labor agreements and the consolidation, the number of workers in the aluminum industry has been slowly decreasing, except for a small blip in the mid-1990s. In 1983 there were 28,100 workers; by 2001 the figure was down to 20,200. The industry employed 15,400 production workers, who were paid an average hourly wage of $21.03.
Historically, the U.S. aluminum industry has been adept at expanding overseas and capitalizing on its foreign assets. Indeed, the aluminum industry has a greater presence abroad than many other U.S. industries. Some 50 percent of Alcoa's sales is derived from overseas sources; for Reynolds, the figure is 23 percent.
Russia. In the early 1990s international developments were the source of the industry's major problems. While shipments in the U.S. in 1992 were healthy as the economy pulled out of recession, conditions in Europe and Japan remained depressed; meanwhile, Russia was rapidly increasing its aluminum exports. Since 1978 the price of aluminum ingot (which is eventually reflected in sheet, plate, and foil quotes) has been set on the London Metal Exchange (LME): it fell from above a peak of $1.65 in 1988 to $.50 in late 1993. With the international supply/demand equation unbalanced, producers worldwide were suffering. As Lloyd T. O'Connell, Reynolds Metals' chief economist, told the Wall Street Journal: "If the demand is weak abroad, it's almost as bad as if demand is weak domestically. The LME doesn't care where the metal is."
Thus, in 1994 the industry signed a two-year Memorandum of Understanding to limit worldwide supply; it reduced overall capacity by 1.5 million to 2 million tons, and Russian capacity alone by 500,000 tons. With the expiration of the agreement in 1996, some analysts predicted that Russian product would eventually be needed for rising demand from both industrialized and developing countries. Initially, however, Russian aluminum exports to the United States fell sharply, declining to 8,800 tons for the first ten months of 1996 compared with 112,500 tons for the same period in 1995. The sharp drop reflected the quality problems some users had encountered in even the most basic sheet alloys.
Japan. In recent years, U.S. producers have strengthened ties with Japanese aluminum and steel companies. In September 1990, Alcoa and Kobe Steel announced a strategic alliance to exploit worldwide opportunities in aluminum that resulted in four joint ventures in the United States and Japan. The agreement was particularly noteworthy because the steelmaker has strong relationships with the automobile industry.
Mexico. With the passage of the North American Free Trade Agreement (NAFTA), trade between the United States and Mexico in aluminum has received increased attention. The role of Mexican aluminum manufacturers in the U.S. auto industry was expected to grow significantly between 1997 and the year 2000. Such companies as Nemak SA of the Alfa Industrial Group should be a major source for aluminum castings, particularly in power train applications. The increase in trade wasn't expected to be in just one direction: Mexico's imports of secondary aluminum rose to 20,000 tons in 1996, owing to increased auto production following the passage of NAFTA.
The enormous strides that aluminum has made in displacing steel and other materials in the container/packaging, automotive, aerospace, and construction markets demonstrates the substantial investment it has made in research and development. This effort has been instrumental in developing a wide range of new aluminum products including beverage cans, baseball bats, grain bins, roofing, windows, appliance parts, and truck trailers; it has also yielded stronger, lighter, cheaper alloys, and improved production processes. A comment of David Moison, a consultant at Resource Strategies, to the Wall Street Journal is telling: "People in aluminum don't have the belief somebody's going to use it just because they make it. They've had to fight like hell to convert people to aluminum."
Producers have also made remarkable strides in improving productivity, which has advanced from 15 manhours per ton in the 1960s to 6 man-hours per ton in the early 1990s. Since aluminum by weight costs six times as much as steel and is so energy-intensive, the industry has had to strive constantly to reduce its costs to remain competitive. In 1994 Alcoa received grants totaling $33 million from the Department of Energy to develop more efficient methods for producing both alumina and aluminum sheet.
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