Global aluminium demand and pricing impacting local supply

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Manufacturers’ Monthly talks to Capral Aluminium about how supply shortages and rising LME is impacting Australian aluminium suppliers.

If you’d sat behind the desks of the CEOs of some of Australia’s leading transport, marine, and industrial fabrication businesses in March 2020 – as the first wave of COVID restrictions were rolling across Australia – it would be near impossible to predict the turn of events these industries would experience over the coming 24 months. Many were forecasting reduced demand, industry down turns, contemplating staff reductions and operational stand downs.

Fast forward 24 months and industry voices are reporting riding a collective wave of strong demand in marine, transport and general fabrication sectors. Local manufacturers are benefiting from the reduced presence of imported aluminium products, spurring on increased demand for locally fabricated aluminium products.

Like many suppliers to Australia’s transport, marine and industrial sectors, the strong growth and demand across these areas has created a different type of challenge for local businesses using aluminium, who are now faced with supply challenges due to material shortages and supplier capacity while being subject to unprecedented aluminium pricing pressures.

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Capral Aluminium CEO Tony Dragicevich.

In fact, according to Tony Dragicevich, Capral Aluminium CEO, capacity to supply aluminium products within Australia has never been pushed so hard with pricing impacts and supply shortages affecting everything from beer cans to car parts, not to mention plate, sheet and extruded products.

Capral Aluminium is Australia’s largest producer and distributor of aluminium products. The diversified business supplies to a wide range of industrial and manufacturing sectors as well as commercial and residential building and is Australia’s largest aluminium supplier to the transport, marine and general aluminium fabrication sectors.

“Capral has seen a significant change in requirements for local aluminium supply over the past 18 months, we are noticing growing market share against import products,” Dragicevich says.

“Of course, the Australian industrial, transport and marine sectors are currently very buoyant and our customers supplying these industries are under pressure to meet the strong demand.”

Australia is not the only country where the economy has been boosted by government stimulus. In addition to supply pressures there has been a significant lift in global commodity demand and prices, including aluminium.

Aluminium pricing can be complicated to understand for those of us who don’t delve into the world of commodity markets,  there are three core elements impacting on the price of  aluminium, all of which are experiencing record highs and ultimately impacting on price of fabricated aluminium products.

1. LME

LME is the market traded price of aluminium on the London Metal Exchange and is used globally (outside of China) as the primary cost of Aluminium. LME prices reached their highest since 2008 on in early February this year above $4.40kg, up a massive 60 per cent from the start of 2021.

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2. Billet Premiums

Aluminium extrusion manufacturers, including Capral, extrude the aluminium profiles from a billet, being the base material extruders use for production. Billet is purchased from primary aluminium smelters both in Australia and internationally, where smelters add a number of base premiums for extrusion billet supply.

Over the past decade base billet premiums have been stable due to a reasonable supply/demand balance for billet across the globe. The situation has changed dramatically for 2022. Global demand for billet in 2022 has outstripped supply and has led to up to 350 per cent increases in premiums for 2022 smelter supply contracts.

3. Extrusion Supply

With record levels of local extrusion supply and many extruders operating a full capacity it is likely that Australian industrial, transport and marine fabricators will see the cost increases of aluminium raw materials experienced by the local extruders passed on through the supply chain. No doubt this will also place pricing pressures on these businesses as the cost materials is set to rise over the coming year.

So, what is the forecast for 2022? Industry experts are purporting the cost of aluminium will remain relatively high throughout 2022. Global factors play a large part in understanding this scenario, not least the impact of government directives in China and Russia who have traditionally been strong suppliers of aluminium to the global market.

As China decarbonises, increasing smelting cuts have been taken to meet regional energy consumption and energy intensity targets under China’s 5-year plan to reduce emissions. China aluminium cuts are now ~2.3MT/year with unpredictable supply outcomes in the coming months. Combined with other factors already described this has driven up LME metal prices to multi-year highs.

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Finally, freight costs and availability continue to place pressure on the local supply of imported billet with spot prices for containers increasing by more than 200 per cent in 2021 and the shortage of containers is expected to persist in 2022. Costs for importers to ship to Australia will also increase significantly. Therefore, from a profitability perspective, aluminium smelters may be able to generate higher margins in alternative markets, such as the EU and US, relative to Australia with strong product and market premiums. To maintain the flow of billets in Australia, the product premiums have substantially increased.

Dragicevich says from a local perspective this really is a double edge sword for Australian extruders, who have excellent demand but are dealing with continually rising costs.

“At Capral Aluminum we are working very hard to ensure our plants are operating at full capacity and maximum efficiency so we can mitigate any unnecessary cost increases for our customers within the transport, marine and industrial sectors and meet their expectations around timely supply,” he says. “We are committed to supporting our customers in these areas and have worked very hard to establish the additional capacity needed to supply local manufacturers. Throughout 2021 we have made a number of capital improvements and have even brought an additional extrusion press online to meet demand.”

“There are few industries who are not facing unprecedented times in response to COVID 19 and the changes it has brought to our economy, the transport, marine and industrial, manufacturing industries are no different, I hope these sectors will continue to support our local manufacturers well into the future.”

For more information on Capral Aluminium, click here