Fear over impending recession causes US buyers to halt aluminium orders

Aluminium customers in the United States are deferring new orders over the fear of impending recession that may be caused due to increased inflation and deteriorating supply chains. According to numerous persons who trade the lightweight industrial metal, spot trades have taken a break in recent weeks as Russia's invasion of Ukraine contributed to the market's already high wait times and declining demand. Buyers are continuing to get their contractual metal, but recent economic indicators have caused some to delay acquiring more metal for their shipments.

A key cause of the delay is the automobile industry's chronic semiconductor shortages, which are preventing carmakers from reaching full capacity. According to data from the Aluminum Association, the car sector consumes 31% of all aluminium consumed in the United States. In the previous two weeks, the cost of shipping aluminium to the Midwest of the United States has decreased, indicating that quotation activity has slowed.

“There is demand destruction happening at different fronts, but since the market is still working on back orders, market participants are not really feeling it yet. It’s about shortages of key components, but also it is about demand exhaustion — the people who wanted an RV, boat, bicycle, washing machine or those who remodeled their houses, it’s over,” said Jorge Vazquez, the managing director at Harbor Intelligence.

Last month, a gauge of US manufacturing activity fell to its lowest level since 2020 as new orders and production slowed, while consumer prices in the United States rose by the most in 40 years as higher gas prices and food inflation increased pressure on the US Federal Reserve to raise interest rates.

During Alcoa Corp.'s earnings call last week, the company's chief executive officer noted that chip shortages are making supply-chain breakdowns more challenging, with knock-on effects for wider economic development. While Alcoa's full-year shipping forecast remained unchanged, the Pittsburgh-based company now anticipates global aluminium demand to rise by 2% this year, compared to its previous forecast of 2% to 3%.

While the automobile industry has slowed, aluminium remains a bright light. The aerospace industry is doing well in terms of sales and packaging. Packaging, which accounts for one-fifth of all aluminium demand in the United States, has increased in recent years as more consumers opt for cans over plastic bottles. And aluminium manufacturers aren't expecting a significant drop in exports anytime soon.

“We see the COVID situation that’s evolved again in China, and we’ve got the war so it’s hard to see how it will play out. We are concerned that with the pressure we see now that we could go into a recession, but there are so many things going on,” said Hilde Merete Aasheim, the CEO at Norsk Hydro.

Buyers and sellers are waiting to see if inflation, supply-chain bottlenecks, and rising energy costs will persist into the second half of the year. The extensive economic consequences of China's COVID-19 restrictions add to the uncertainty.