Consumer upturn helps aluminum shine
Business people don't like surprises - unless, of course, they're profitable ones. Robert Slagle, treasurer of the Aluminum Company of America (Alcoa), says he ''continues to be surprised'' over the strength of recovery in the aluminum industry and at Alcoa. ''Everything we've seen has been more optimistic than we planned on.''Skip to next paragraph
Subscribe Today to the Monitor
That's an unusual comment to be heard from the metals industry, where steel and copper are still mired in a recessionary swamp.
What is Mr. Slagle so optimistic about? Orders, for one thing. ''Bookings are continuing strong. Normally, the third quarter is a seasonal low, and we haven't seen that so far.'' For the first six months of this year, shipments in the industry are up 8.7 percent, compared with the same period last year, according to the Aluminum Association.
This has brought more production facilities on line. In the first quarter of the year, the industry was operating at a low of 57.5 percent of capacity. Clarence Morrison, an analyst at Dean Witter Reynolds Inc., figures 70 percent of capacity is being used in the third quarter, and he expects 74 percent in the fourth.
What has made this burst in output so pleasant for the aluminum-makers is that they are getting considerably more for their products now than they did in the recession. Prices for aluminum ingot reached a recession low, hitting 42 cents a pound (ingot is the base aluminum product from which all finished products are made). Since then, demand has pushed aluminum prices on the London Metal Exchange as high as about 76 cents a pound; the price was quoted Wednesday at 70 cents.
Aluminum has been riding the recovery wave because it is used primarily in the consumer market - where the upturn has begun. Aluminum goes into cars, appliances, and beverage cans (which have done especially well because of the hot summer). Unlike steel, aluminum doesn't rely so much on the capital goods markets (equipment, buildings, and machinery), which are still waiting for the recovery breeze, Mr. Morrison explains.
More important, believes Peter Merner, of Merner Research Inc., a securities firm, aluminum-makers haven't been floating around in a lot of excess world supply the way steel- and copper-makers have. Compared with other metals, ''a much bigger fraction of the world's aluminum is located in (countries) where the product is managed economically rather than socially,'' he says. Overall, output shrank at about the same pace as demand. He says producers didn't keep churning out the metal because of social obligations to employment, as happened, for instance, in the West European steel industry. This made the aluminum industry more responsive to demand when it began to pick up.
At first, the industry was skeptical when demand moved up early this year. It believed customers were stocking up lest a strike come at the time of labor negotiations in May. Moreover, expected price increases were sparking early buying. But with the three-year contract that keeps wages in check now settled and prices expected to rise only modestly by the end of the year, the industry is confident that demand is ''for real.''
John Blomquist, vice-chairman at Reynolds Metals Company, thinks the strong recovery will continue. He says customers ''are scrambling to replenish inventories, yet their inventories-to-sales ratios are still near their lowest levels in more than 25 years.''
This kind of growth, plus firmness in pricing, will put the company in the black by the fourth quarter. In the second quarter, it suffered a $69 million loss - although $52.7 million was a one-time write-off for discontinued plants.
There is still room for recovery in this industry, at least until 1985, analysts say. But with the economy slowing down now, there will be only ''moderate growth throughout the remainder of the year and into 1984,'' figures Thomas Langton, head of the metals division at Chase Econometrics. He puts growth in aluminum shipments next year at 6 to 8 percent.
One reason is that no new, significant markets for aluminum products are on the horizon. The industry has hoped US automakers would make a big move toward lightweight aluminum cars, especially during the energy crisis. But ''the industry has been unsuccessful'' in getting Detroit to adopt the aluminum concept, says Mr. Merner, and is instead trying the ''bandaid'' approach of getting aluminum into as many car parts as possible.
In contrast, industry executives see an exciting market in aluminum food cans , now made out of tin plate. Alcoa and the Continental Can Company are together building an aluminum can facility that will make these products at a lower cost next year. Alcoa's treasurer, Mr. Slagle, says the company is counting on new markets like this.
Aside from markets, the other big obstacle is costs, especially energy costs. Both Alcan and Alcoa have the upper hand in this area, the major reason, analysts say, that they were profitable in the third quarter while Kaiser and Reynolds had losses.
As far as investment goes, most analysts feel the prices of aluminum stocks will continue to rise, but that ''they are overvalued. . . . There is enough money to be made so that it's worth sticking around if you own, but not enough to go chasing them when they are already up so high,'' says Merner at Merner Research. Dean Witter's Morrison, however, remains bullish.