February again brings us to the month in which we focus on nonferrous materials and processing. For this reason, we will use this space to look at what is happening in this industry, which for our purposes is primarily aluminum and copper. Of the two, aluminum clearly is the volume leader while copper remains a more highly priced commodity.

On Monday, Jan. 9, Alcoa held a public meeting to discuss 2011 and look forward to this year. Through the marvels of technology, we were able to take part in this meeting. What Alcoa experienced in 2011 and sees ahead should be similar to the aluminum industry in general. In Q4-2011, Alcoa experienced a $193 million loss. They attributed this loss to lower aluminum prices, continued market weakness and charges associated with closing high-cost production capacity. They have decided to reduce their smelting capacity by 531,000 tons (12%), which is opposite their decision to increase smelting just one year ago.

Alcoa’s Chairman and CEO, Klaus Kleinfeld, indicated that the primary aluminum industry finished 2011 with a slight supply surplus. This, no doubt, contributed to the pricing pressures experienced by Alcoa and other primary aluminum producers. In this column one year ago, we talked about “The China Factor,” which appears to have affected the global supply and price pressures. Kleinfeld believes that China will remove some of their supply because it is very unprofitable due to high input costs. Assuming that this happens and factoring in Alcoa’s 12% smelting-capacity reduction, Kleinfeld is projecting a deficit of 600,000 tons of primary aluminum in 2012. I’m sure the hope is that this will result in a material price increase, which would help the 2012 profitability picture for Alcoa.

Some of the expected 2012 supply deficit is expected to be due to a projected overall global demand growth of 7%, which is down slightly from 2011’s growth of 10%. In 2012, this growth is expected to be comprised of 10-11% in aerospace, 5-10% in the North American automotive industry and 3-6% for automotive worldwide with 5-7% in heavy trucks and trailers in North America.

Kleinfeld mentioned that simply replacing the steel wheels on trucks with aluminum will result in a 3-5% fuel savings. Aluminum usage in cars is up from less than 100 pounds in 1980 to almost 300 pounds (on average) today. Future growth is expected in aluminum sheet and extrusions for car body applications, particularly doors and hoods.

Aluminum substitution for steel in automotive applications has been slow due to the higher cost of aluminum, resistance to change and the costs associated with retooling. Aluminum is on average 20-40% lighter than steel and can be made equally crash-worthy at a cost premium of 300% as compared to steel. The CAFÉ standards imposed by the DOT and EPA are putting the pressure on manufacturers to reduce vehicle weight. Fuel-reduction requirements to take effect in 2016 will require a 7-20% fuel-efficiency improvement. It is believed that switching a steel body to one made primarily of aluminum will create a 10% gain in fuel efficiency, which is why this becomes the low-hanging fruit. A switch of this nature will cost $500-$1,500, but it could save up to $4,000 in fuel costs, depending on the price of gasoline. For this reason, expect car manufacturers taking this approach to pass this premium along to car buyers.

The driving force to substitute aluminum for copper has increased in the past few years. The copper/aluminum price ratio has increased from 2 to a new high of almost 4, which encourages the substitution for certain applications. On a per-pound basis, aluminum is actually more conductive than copper because it is about one-third the weight. Substituting aluminum requires a diameter increase compared to copper, so size-limited applications such as hand-held electronics will continue to use copper. Alcoa believes that aluminum can replace 20% of the copper used annually, but this is obviously a much smaller market than steel. Industry experts believe this substitution will more realistically be 10%, which is about 1.5 million tons per year.

In addition to pricing and supply issues, another concern of the aluminum industry is carbon taxation. The December issue ofAluminium International Todaycarried a news story that said, “Australia’s new carbon pricing plan will cause a contraction in the country’s energy-intensive aluminum industry, already under pressure from cheaper Chinese output, the Australian Aluminium Council said.”

I couldn’t have put it better myself. Check out the Environmental & Safety column on page 24 to see what is already happening right here in the U.S. What will the effect be on U.S. aluminum producers if this goes national?IH