The coronavirus pandemic has obliterated global metals demand as one of the main end uses, automotive applications, has seen major disruptions to the supply chain.
The US metals market, in particular, saw the removal of an estimated 33,000 vehicles per day from production as all major auto producers across the country halted operations in response to government mandates and concerns over the welfare of workers.
Because the transportation sector is the largest end user of aluminum, accounting for around 35% of aluminum consumption, it is easy to see why so many market participants expressed concern over the lingering effects coronavirus would have on the health of the industry.
Domestic aluminum producers, including rolling mills and billet remelters, saw a notable drop in demand, and in response halted production intermittently, or were running at reduced capacity, in some cases as little as 30%-40%, or a combination of both.
The index of net new orders for aluminum mill products published by the Aluminum Association showed total demand in May down 27.6% year on year. Foil orders were off 30.3% from May last year while extruded products were down 38.7%.
The end of May brought auto restarts, but only at reduced capacities as companies strived to make their facilities safe and ramp up production. Market sources speculated that July may be the first month to see any real recovery.
Because of the lack of demand, only around 16% of US imports of primary aluminum came from dutiable countries since June 2019, down from 75% in the first half of 2019. This lack of demand, coupled with a lack of dutiable metal in the US, caused the S&P Global Platts Midwest Transaction Premium to hit a two-year low of 8 cents/lb on May 1.
The market saw trader interest rise in May, which pulled the premium for primary aluminum P1020 t-bars/sows up 50 points to 8.50 cents/lb, where it has remained since June 8, but these are still historically low levels.
Despite the negative effects seen in the US metals markets, one sector in particular has actually benefited from quarantine and stay-at-home orders – the US beverage can industry. Canned beverage demand was up 8.3% in the first quarter, with canned beer rising 6.7% and soft drinks up 9.3%, according to the Can Manufacturers Institute.
In the US, 25% of sales are on premise, meaning in a bar or restaurant, while the bulk of cans are consumed off premise, according to one beer maker. “When the pandemic started, that on-premise [number] dropped 98% and off-premise went up almost the same,” he said. “In the US, our bottler forecasts are not saying it will let up,” said one large can maker. “We are struggling to get cans.”
Latin America plugs the gapAluminum cans have 73% recycled content, most of which comes straight from used beverage cans (UBC). Although typically the US consumes its own UBC scrap, can makers say they are having to import cans to keep up with demand.
“Here in the US it’s very strong,” the can maker said. “It was already growing. All I know is we’re making every can we can make.” “The rest of the world isn’t the same way,” the beer producer said. “People in the US are staying home drinking more cans, but [staying home] hurts demand elsewhere [where they are consumed more in restaurants].”
Given the shortage, consumer packaged goods companies have been actively looking at options from Mexico and as far away as Brazil because in both of those markets demand has dropped. “Cans in Brazil are upscale and almost exclusively in bars and restaurants,” said the can maker.
“Here it’s a stockist business – you almost buy them more when you are stuck at home.” He said that it made little financial sense to import can scrap, “but we are out of options from local suppliers.” The can maker also said can demand in the US had declined 1% annually for decades, but that in 2019 can demand was up almost 5%. “That was the first kind of shock wave and at the end of 2019 for 2020 it just jumped again,” he said.
In addition to more demand for can sheet, US generation of scrap has declined due to the ongoing pandemic, creating this void in the market. The scrap market is seeing substantial tightness, as both consumer and industrial flows have dropped substantially.
With deposit states – those with container deposit laws designed to reduce litter and boost recycling – shut down for several months, less UBC scrap has been coming back into the supply chain. Some market participants say a can shortage could last into the fourth quarter, so anyone running can sheet may need more P1020 to fill the void.
Certain states reopened their redemption centers in June as stay-at-home orders were lifted, allowing scrap dealers to return to work, a sign of life for the recycled content market.
“As you know, when we entered the COVID period, UBCs were plentiful and cruising along until the closure of deposit states and recyclers when the market became tight,” said one scrap buyer.
He pointed to the reduction of UBCs causing spreads to contract, moving UBC spreads to 65% of the Platts Midwest Transaction price, whereas earlier this year – as is typical for the scrap grade – spreads were around 58%. In contrast, UBCs dipped to 52% of Transaction in 2019 when they were overflowing at scrap yards.
“Now that COVID is easing with restarts of recycling and some deposit states opening, the stress is easing,” the mill buyer said. July pricing was coming in around 60% of the Transaction price, or around 48-50 cents/lb, and buyers said they anticipated spreads widening even further.
But some say the effects will linger for a few more months, and there is still the worry of a resurgence in the virus, which would put the market back on pause.
“Even with the reopenings, there still won’t be any scrap yet,” said a trader source, adding that a 90-day lag should be factored in on top of a best-case opening date, such as June 30.
On that basis, “August 30 is when we’d see normal scrap, and you need good collection,” he said. “A lot of it comes off the scale–but how many people are out collecting?”
“UBCs are running out,” said one rolling mill source. “Now Canadian [producers] are being asked to produce 3104 or 2004 [can sheet grades] for can body and that helps, since all their other businesses dried up.”
This is an about face from last year, when UBCs piled up in scrap yards because rolling mills were converting fewer of them into new can sheet in favor of higher margin, flat-rolled aluminum sheet for the automotive industry.
This year has turned the world on its head, and the aluminum industry has not been immune. If 2020 has taught us nothing more, it’s to prepare for anything and expect the unexpected.