The COVID-19 pandemic continues to cause profound disruption to global supply chains across a range of industrial sectors. One area experiencing turbulence is in the supply of aluminium, writes Tony Dragicevich of Capral Limited.
If you’d sat behind the desks of the CEOs of Australia’s leading industrial fabrication, transport and marine businesses in March 2020 as the first wave of COVID-19 restrictions rolled out, you’d never have predicted the turn events these industries would experience over the coming 24 months. Many were forecasting reduced demand, industry downturns, staff reductions and operational stand-downs.
Fast forward two years and as an industry we are riding a collective wave of strong demand. Local manufacturers are benefiting from the reduced presence of imported aluminium products, spurring increased demand for locally fabricated aluminium products. The strong growth in demand has created a different type of challenge for local businesses that use aluminium, who are now faced with supply challenges due to material shortages and supplier capacity, while subject to unprecedented aluminium pricing pressures. In fact, 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 and rolled products.
Capral Aluminium is Australia’s largest producer and distributor of aluminium products, supplying to a wide range of industrial sectors as well as commercial and residential building. It is also 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.
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. However, 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.
- LME is the market-traded price of aluminium on the London Metal Exchange and is used globally (outside China) as the primary cost of aluminium. LME prices reached $4.40/kg in early February, their highest since 2008, up a massive 60% from the start of 2021.
- 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% increases in premiums for 2022 smelter supply contracts.
- 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 with the cost of materials set to rise over the coming year.
So what is the forecast for 2022? Industry experts expect the cost of aluminium to remain relatively high throughout 2022. Global factors play a large part in 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.
In August 2021, Russia imposed at 15% export tax on aluminium. This further increased regional market premiums and presents an upside risk on prices. As China decarbonises, increasing smelting cuts have been taken to meet regional energy consumption and energy intensity targets under China’s five-year plan to reduce emissions. China aluminium cuts are now around 2.3MT/year with risk of further cuts in coming months. Combined with other factors already described, this has driven up LME metal prices to multi-year highs
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% 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 increase.
From a local perspective, this is a double-edged sword for Australian extruders. We have excellent demand, but costs continue to rise. At Capral 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 and meet their expectations around timely supply. 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 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 industrial, transport and marine sectors are no different. I hope they will continue to support our local manufacturers well into the future.
Tony Dragicevich is the Managing Director of Capral Limited.