Insight: Aluminum costs push Japan's brewers to put new beer in new bottles

From relatively traditional roots, the Japanese beer industry became a hotbed of innovation in 2018 — giving rise to new and esoteric brews, and causing brewers to think again about the use of costly aluminum as a packaging material.

For over 100 years, legislation dictated that beer had to contain 67% malt, with the balance of 33% strictly water, hops, yeast, corn, rice, or more malt. But a revision of the country’s alcohol laws – or “Shuzei ho” – which went into effect April 2018, allowed breweries to introduce a new gamut of flavors, including potato, fruit and spices. The revised legislation has also allowed the malt content in beer to be lowered to 50% from the earlier 67%.

The legislation opened ways to reduce input costs and create more innovative product lines offering new and different drinking experiences. With brewers facing a challenging domestic market due to Japan’s declining population, they quickly embraced the opportunity. Products with fewer calories, less sugar and purine soon sprouted, as well as beer-tasting beverages with no alcohol, appealing to the health-conscious.

One liquor store owner said they were satisfied with the resulting sales. Instead of detracting from real beer sales, he said non-alcoholic “virtual beer” was contributing to sales of its more potent counterpart.

“After giving their liver a break with virtual beer, customers go back to drinking real beer the next day,” he said.

Virtual beer appears to be creating a new market, allowing customers to relax outside without going to a bar. Many offices do not allow non-alcoholic beer to be drunk at work, so instead people often take their drinks outdoors to unwind.

It’s not the first time that Japan’s breweries, steeped in hundreds of years of tradition, have decided to experiment: 2015 saw the launch of collagen beer, a brew with added collagen, targeting women who want to increase their intake of the natural protein.

Losing its fizz?

The rise of virtual beer has implications not just for the future of the beverage industry, but also for the aluminum that has traditionally been used to make beer cans.

The beverage sector in Japan uses 20–30 billion cans annually, driving total aluminum consumption of 400,000–500,000 mt/year. This consumption is drawn from primary aluminum, all of which is imported, as well as recycled cans sourced locally.

The cans are made domestically by melting the primary aluminum and used can feedstock, pressing the molten aluminum into sheets, and cutting the sheets into cans. Japanese can imports are marginal, at 50 million cans per year – or about a quarter of a percent at most.

The prices of key inputs for Japan’s breweries changed significantly between 2016 and 2018. For example, between January 2016 and January 2018, the price of imported hops fell 64% to just ¥1,297/kg ($11.77/kg), according to customs data.

Price movements in other materials, such as ethanol, wheat and aluminum, were less favorable (see chart, below). Although the aluminum used in cans typically only makes up 5–10% of total production costs, the “all-in” price of Japanese aluminum, including both the LME cash aluminum price and the S&P Global Platts CIF Japan spot premium, rose 22.8% between January 4, 2016 and January 4, 2018, reaching $1,941.25/mt. By January 28, the all-in price had risen further to $1,942.75/mt.

The shift in Japanese aluminum prices reflects a drastic change in fundamentals. In 2015, aluminum supply was so abundant that, at times, using fresh aluminum was cheaper than recycling used beverage cans. Since then, the global aluminum balance shifted towards a deficit thanks to increases in demand from emerging market economies, as well as the closure of high-cost smelters in China and elsewhere.

Since 2016, China’s war against pollution has led non-compliant steel and non-ferrous metal production facilities to close, while the country’s government has been discreet about new plant starts.

Then there was the US government’s targeting of Russian aluminum producer Rusal with sanctions in April 2018 – a decision that was only reversed on January 28 this year. Within two weeks of the sanctions being imposed, benchmark LME aluminum prices rose by $599/mt, or about 30%.

Rusal had previously been exporting 4 million mt/year to Japan, leading to concerns this supply could suddenly become unavailable. In the two weeks after the sanctions were announced, the S&P Global Platts CIF Japan spot premium ballooned from $112.50/mt to $187.50/mt.

Other, longer term factors have also been at play – including rising consumption from domestic auto manufacturers. The beverage industry’s 400,000-500,000 mt/year aluminum consumption is larger than that of the automotive sector, which stands at about 300,000 mt/year. However, market participants forecast auto demand will outgrow that of the beverage sector. Kobe Steel forecasts Japanese aluminum sheet demand for cars will soar seven-fold from 2016 to 2025. Japan’s total aluminum sheet production capacity is 2 million mt/year, which would not be enough to accommodate demand growth from the auto industry.

If brewers intend to continue using 400,000-500,000 mt/year of sheet metal for cans, they need to pay to sheet makers attractive processing fees to match that of automakers. Currently, automakers are said to be paying at least 30% more for their sheets.

Thinner sheets Challenged by higher aluminum prices, brewers have tried aluminum cans made of thinner sheets. In 2016, Kirin and Universal Can co-developed an aluminum can weighing just 13.8 grams, the lightest can on record in Japan. The Kirin-Universal can achieved a weight reduction of 0.8 grams, or 5%. If used more widely, the can would result in savings of roughly $100 for every 70,000 cans.

To go even further, breweries have looked at less costly substitutes. But cost is not the only ingredient for success when it comes to beer packaging: the material needs to provide strong protection from heat and light, ease of transport, and should also be recyclable. Steel and glass are two potential alternatives. However, while steel can be less than quarter of the cost of aluminum, it is heavy by comparison, as are traditional glass bottles.

Of these criteria, recyclability has become increasingly important as environmental sustainability is now a key operating metric for beverage makers. Breweries are vocal about being green, and some plants aim for the full reuse and recycling of all resources. Japanese beer makers resell waste from breweries to livestock farms, while containers are recycled. Aluminum can be used for several life cycles, with cans being re-melted and used over and over again.

On a relative basis, PET is increasingly seen as an ecologically friendly resource. As of 2017, Japanese recycled plastics production stood at 2.06 million mt/year, according to the Japan Waste Management Institute. Of the total 2.06 million mt, around 26% of this is PET, while 20% is polypropylene, 16% polyethylene and 15% PVC.

In response, breweries made what some might consider a logical cost-control decision: to move towards plastic bottles made from PET. However, the move was confined to non-alcoholic virtual beer. Although there is no official explanation as to why, sources said was likely the non-traditional market segment was less hostile to change than drinkers of real beer, who had got used to sipping their beverages from aluminum cans during the past 30 years.

Non-alcoholic brews that now come in unusual PET bottles include Suntory’s All Free All Time and Asahi Brewery’s Asahi Dry Zero Spark. Both look like radically different products compared with the traditional beers to which Japanese drinkers have become accustomed.

Outside the beer industry, PET and paper dominate the market for food packaging. If PET were to entirely replace aluminum in the beverage sector, as much as 500,000 mt/year of Japanese demand could be under threat. But sources suggest such a move is unlikely. One can maker said aluminum will continue to comprise a major share of beer packaging.

The liquor store owner agreed. The overwhelming majority of buyers still reach out for aluminum cans, he said, rather than PET.

“The feel of aluminum cans and the taste of beer come together.”

Additional reporting by Andrei Agapi, Hui Heng, Srijan Kanoi, Samar Niazi, Vanessa Ronsisvalle, Serena Seng & Takmila Shahid