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August 12, 1983
Aluminum Rebounding
After the dismal performance of the past few
years, the U.S. aluminum industry is finally
staging a solid recovery. The course the
industry has followed since the 1970s is a
classic illustration of the interaction of
supply and demand, in which U.S. producers' hopes for higher aluminum prices
were thwarted by a worldwide excess inventory of the metal. Not unti I the early part
of this year when curtailed production and
improved demand reduced the world oversupply of aluminum did selling prices begin
to improve. Because most forecasters expect
further growth in U.s. economic activity and
hence in the demand for aluminum, the
industry should benefit from still higher
prices as 1983 unfolds.
The recent recession
Because the aluminum industry relies
heavily on the construction and transportation equipment markets-its second and
third largest outlets, it has always been
subject to wide cyclical swings in demand.
The recent recessions were no exception.
Between 1979 and 1982, the domestic industry experienced a 17 percent decline in
shipments of primary ingot and fabricated
mill products including such semi-finished
items as sheet and plate, foil, wire, and tube.
Shipments to the key construction and transportation equipment industries registered
the sharpest declines, falling by 27 and 41
percent respectively. Shipment to the consumer durable, electrical equipment,
machinery and export markets also declined, although by smaller percentages.
quite successful in stabilizing market prices
by cutting production at the primary (ingot)
stage of production. They renewed these
efforts late in 1980. Between 1980 and
1982, U.S. producers cut their primary
output by nearly 30 percent, reducing their
average annual rate of capacity utilization
from 95 to 65 percent, but they were unable
to maintain market prices even though the
overall decline in U.S. aluminum shipments
during the 1979-82 period was less than
during the 1973-75 recession. The bottom
had fallen out of the worldwide aluminum
pricing structure.
Overseasexpansion
Major changes had taken place in the
worldwide structure of the aluminum industry during the decade of the 1970s. That
decade witnessed the proliferation of
primary aluminum production plants outside the United States, as new smelting
facilities shifted to areas where low-cost
energy sources, especially hydroelectric
power, and raw material bauxite supplies
were available. Significant new production
capacity waS constructed in Spain, Venezuela, Brazil and Australia.
Only aluminum's largest outlet, the container and packaging market, moved against
the recessionary tide. Shipments to that
market rose by 12 percent over the 1979-82
period, thereby growing from 22 to 29 percent of the total end-market.
Because some of these nations were not fully
integrated producers and did not own fabricating facilities for marketing their output,
they turned to the london Metal Exchange
(l ME) to sell their primary production.
Aluminum sales on the l M E began in 1978,
and, although the market has captured only
a small share of the world aluminum trade,
the l M E price became the reference price
for non-integrated foreign producers and
traders. The result was the development of
an international market structure that,
together with the increased recycling of
scrap, has reduced the ability of major U.S.
integrated producers to influence prices by
changing their own output.
In previous downturns, notably the 1973-75
recession, major U.s. producers had been
Unstable prices
Although consumption elsewhere through-
IP1
iilllThlk
(G)ll
I F1YINJIM:::
II
Opinions expressed in lhis newsletter do not
necessarily reflect the views 01 the management
of the Federal Reserve Bank of San Francisco,
or of the Boarcl of Covernors
Reserve Systell1.
of the Federal
realized for foreign-produced metal, the
nation's third largest producer-Kaiser
Aluminum and Chemical Corporationannounced an historical change in its
traditional pricing policy. Instead of posting
a list price which the company changed
infrequently, the firm announced that it
would adopt a "transactions" price that
would be more responsive to market conditions. The transactions price would fluctuate
in close correspondence with the LME price,
and include transportation costs.
out the non-Communist world also fell
during the period from 1979 to 1 982,
primary production outside the United
Statesactually increased slightly. Certain
foreign producers, in their desire to earn
foreign exchange, continued to expand
production. Only Japanesefirms cut their
output back sharply, and they did so
because of exceptionally high energy costs.
Between 1973 and 1979, U.s. producers
watched theirshare of total non-Communist
world production decline from 41 percent
to 38 percent. By 1982, their share had
dropped to 31 percent as they bore the
major burden of cutting production in the
face of declining worldwide demand.
Despite these cutbacks, producer inventories throughout the non-Communist world
rose another 30 percent between the end of
1980 and early 1982, rising from 4.4 million
tons to 5.7 million tons.
The move from a producer-administered to
a market-responsive price reflected the realities of the marketplace. Confronted with
competition from abundant lower-priced
foreign metal, all U.S. producers had been
forced to discount sharply from the list price
throughout the 1980-82 period, rendering
that price meaningless.
Indeed, the poor financial performance of
the major domestic producers over the
1 979-82 period reflected not only the
decline in their sales volume but the drop
in their selling prices. Between 1979 and
1 981 , the three largest U.s. producers
suffered a 44 percent decline in net income,
and in 1982, a substantial combined loss.
Throughout this period, the industry was
subject to severe energy cost pressures.
Heavily dependent upon natural gas for
their electrolytic reduction process,
producers faced a near-doubling of the
average level of natural gas prices. Facilities in the Pacific Northwest faced an even
greater eight-fold increase in hydroelectric
power prices as the Bonneville Power
Administration averaged in the cost of three
nuclear plants then under construction.
Market prices plunge
U.S. producers boosted their list price for
primary ingot to a record high of76 cents per
pound in late 1980, even though producer
inventories were rising throughout the nonCommunist world. From 1 980 to 1982, they
continued to maintain the list price at76
cents/pound.
Meanwhile, foreign prices plunged downward under the impact of rising worldwide
inventories, as demonstrated in the chart.
The combination of declining worldwide
aluminum prices and a strengthening of the
exchange rate value of the dollar caused the
dollarprice of ingot on the London Metal
Exchange to drop dramatically on a monthly
basis between February 1 980 and June
1 982; it fell from a high of nearly 97 cents/
pound to just under 42 cents/pound. By
February 1983, the LME quotation had
recovered somewhat, reaching 45 cents/
pound, but it still remained far below the
U.S. producer list price of 76 cents/pound.
Recovery in 1983
Only in the past several months have selling
prices for the U.s. aluminum industry really
begun to rebound. Shipmentsduringthefirst
five months of 1983 rose 6.4 percent compared to a year earlier, but the factthat
orders during the first six months were up 27
percent suggeststhat the year-to-yeargain in
Confronted with the wide disparity between
its published list price and the price being
2
ALUMI NUM PRICES AND INVENTORIES
Cants Per Pound
90
80
70
Million Short Tons
,
\
50
40
.... _
\ U.S.prOdUCev·
\
list Price
\
5.6
......
' \
52
•
for Ingot
\-", l . /
\
\1'
/
\-
60
/
/
', 4.
Non-Communist World
\ Aluminum Inventories * /'
'.
\--.-
.
';',
/ London Metal ',/Exchange Spot Price'"
....
1980
1981
1982
'
I
/
"
/
1983
8
4.4
4.0
3.6
End 01 Quarter
• Producer lrwenlorlas of Ingot and fabricated mill products.
reduced and businesses begin to invest in
new plant and equipment. Exports may decline, however, because of the strong
foreign exchange value of the u.s. dollar
and weakness in overseas economies.
shipments will increase as 1983 progresses.
Meanwhile, domestic producers have further reduced inventories, as is evident in
a drop in product stocks throughoutthe nonCommunist world from 5.3 million tons in
December to 4.5 million tons by May.
The overall growth in aluminum demand
should push transactions prices still higher
by year-end, unless the growth of production outpaces the growth of shipments.
Already, U.s. producers have sharply
increased their primary capacity utilization
rate, from 60 percent in December to 67
percent in July, both in response to rising
demand, and they plan to boost the operating rate to 70 percent by September.
This improvement in the supply-demand
balance has resulted in higher market
prices: the price of ingot on the london
Metal Exchange has rebounded from a low
of 42 cents/pound in June 1 982 to the
current level of 70 cents/pound. Major U.s.
producers also have reported an increase in
their actual selling price to 76 cents/pound.
Prices realized for fabricated mill products
have increased accordingly as well. The fact
that these higher prices have continued even
after the May 31 peaceful labor settlement in
the industry confirms that actual consumption has risen strongly from a year ago.
Increased demand and prices should
translate into an improved financial performance as 1983 progresses.The nation's
three largest producers suffered a substantial
combined loss during the first half as the
year-to-year increase in shipments and
prices was not enough to counter continuing
cost pressures. But producers should begin
to experience profits by the second half and
at least break even for the year. The recent
three-year labor settlement involving aluminum workers will helpto hold down overall
cost increases because the unions agreed to
limit their increase in pay to a partial costof-living adjustment.
The cyclical recovery in homebuilding
activity, automobile and other consumer
durable goods manufacturing has already
benefited the aluminum industry. Because
the rebound in these key aluminum consuming industries is likely to be especially
strong and because these customers are
likely to rebuild their exceptionally low
inventories, the growth of aluminum shipments for 1983 as a whole wi II probably
outpace the growth of industrial production
generally, which most forecasters expect to
increase 5 to 6 percent for the year.
Conclusion
looking further ahead, the prospects for the
industry are even brighter. Assumingthatthe
U.S. economy will continue to grow through
1 985 and that the overseas economies will
also recover, the u. S. aluminum industry
should benefit from a further increase in
prices and operating rates from the exceedingly low levels reached during the recession. Domestic firms are developing several
new products and technologies, especially
in the container and transportation fields,
and these should begin to displace other
materials by the mid-1 980s. Meanwhile,
recent cutbacks in,planned additions to
aluminum production facilities mean that
worldwide capacity is scheduled to increase
only moderately.
Yvonne levy and Jennifer L. Eccles
Aluminum shipments to the construction
and transportation industries are likely
to show the most rapid growth. The auto
market will grow both because of increased
production and greater aluminum usage per
car. Shipments to the container and packaging market should also increase, but at a
slower pace since aluminum's displacement
of other materials in this market has slowed
for the time being and deliveries probably
will be limited to the growth in packaged
products volume. Demand from capitalgoods-producing industries also should
begin to pick up late in the year, once excess
capacity in the manufacturing sector is
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BANKING DATA-TWELFTHFEDERAL
RESERVE
DISTRICT
( Dollar amounts in millions)
SelectedAssetsandLiabilities
Large Commercial Banks
Loans(gross,adjusted)and investments*
Loans (gross, adjusted) - total#
Commercial and industrial
Realestate
loans to individuals
Securitiesloans
U. S. Treasury securities*
Other securities*
Demanddeposits- total#
Demanddeposits- adjusted
Savingsdeposits- total+
Time deposits- total#
Individuals,part.& corp.
(large negotiable CD's)
Weekly Averages
of Daily Figures
Member Bank Reserve Position
Excess Reserves (+ )/Deficiency (-)
Borrowings
Net free reserves (+ )/Net borrowed( -)
Amount
Outstanding
7/27/83
162,477
141,145
43,526
56,206
24,101
2,685
8,176
'13,155
40,212
28,878
66,170
65,764
60,136
18,425
Weekended
7/27/83
'72
98
26
Change
from
7 /20 /83
-
-
377
245
321
27
100
275
16
148
769
252
342
191
226
157
Change from
year ago
Dollar
Percent
-
.-
Weekended
7/20/83
97
114
17
1,500
490
754
1,233
708
78
1,819
809
2,138
1,550
35,739
33,961
29,942
19267
0.9
0.3
- 1.7
- 2.1
3.0
2.8
28.6
- 5.8
5.6
5.7
117.4
- 34.1
- 33.2
-51 .1
Comparable
Vear-aQo nPriod
68
25
43
* Excludes trading account securities.
# Includes items not shown separately.
t Includes Money Market Deposit Accounts, Super-N OW accounts, and N OW accounts.
Editorial comments may be addressed to the editor (Gregory Tong) or to the author . ... Freecopies
of this and other Federal Reservepublications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, SanFrancisco 94120.
Phone(415) 974·2246,
JlW@'8@(Q]
@FedFRASER