Volatile aluminum prices raise concerns
Marc Barnes -- Casual Living, March 9, 2011
For many in the manufacturing side of the casual furniture category, aluminum is the go-to material for frames and other components, but recent price increases and unsettled supply availability overseas have prompted concerns.
Even getting answers, as it turns out, can be a challenge.
The question of whether aluminum will increase or decrease in price during 2011 is too often "yes," said Cap Hendrix, president of Tropitone. "I've heard compelling arguments from ‘experts' that aluminum prices are going up and going down in 2011," he said.
Hendrix pointed out that processed aluminum prices increased 62% between December 2008 and November 2010. That meant casual furniture manufacturers have had to absorb cost increases in an effort to build unit volume momentum during a difficult economy.
A mid-January check of the London Metal Exchange showed aluminum prices were hovering at about 60 cents a pound two years ago. The Exchange recorded a dip to 80 cents last year before a steady rise past $1 after the New Year. Recently, they were as high as $1.12 per pound.
Meanwhile, the International Trade Administration arm of the federal Department of Commerce is involved in two cases centering on aluminum. One alleges unfair dumping of aluminum extrusions from China at a margin of 59%; and the other cited countervailable subsidies ranging from 6.18% to 137.65%.
Joe Logan, executive director of the International Casual Furnishings Association, noted the importance of watching such cases because their resolution may require members to consider operational changes. "As you can imagine, we have folks who would fall on both sides of this issue in terms of their production," Logan said. "Our role is to keep our members informed."
Current pricing conditions had origins in July 2008, when the price of aluminum peaked just prior to the financial crisis of that September. Prices have risen since then, both because traders consistently bet long and natural laws of supply and demand, including artificial stockpiling by some, including China.
When demand collapsed because of the recession, stockpiling essentially ended. Primary aluminum manufacturers began taking capacity offline to reduce prices. Prices flattened then began rising steadily.
The combination of all those forces point to a different future, Hendrix said. "China is, and will remain for some time, a major participant in the casual furniture industry," he said. "Nevertheless, they are having their problems."
Hendrix noted the casual industry is not trend-favored by Chinese government policies - and that the U.S. government is exerting considerable political and regulatory pressure to raise prices and clean up their environment.
"I think it's safe to say that the days of absurdly cheap casual furnishings from China are over, or soon will be," Hendrix said.
Rick Butler, vice president of product development for Telescope Casual Furniture, is watching the aluminum markets closely right now and trying to predict which way prices will go over the next 12 months, for budgeting purposes.
"It is interesting to me how aluminum and other metals have moved away from supply and demand to more of a speculation basis," Butler said.
Prices that are too high cause problems for those who use aluminum, while prices that are too low prompt those who make aluminum to shut down their smelters. Now that prices are rising again, smelters are coming back on line.
"The strange part of it is that the price is going up even though there are huge inventories of aluminum on a worldwide basis, which are idle," Butler said. "It's being driven by speculation and by fear-mongering. They say China is using all of the aluminum, and the fact is that they are. But aluminum is produced from bauxite, one of the most common minerals, and there is no shortage of bauxite and no shortage of smelter capacity."
A second factor Butler said has caused prices to rise is that the price of scrap aluminum, used in recycling, is growing closer to the price of prime-ingot aluminum, made directly from minerals. That's because the supplies of recycled aluminum materials are beginning to dry up.
"It really is a lot different now than it was a decade ago," Butler said. "Then, you could predict what it was going to do, and you could be comfortable in a forward buy and locking in the price, but those days are gone."
The bottom line? "I expect it to continue to trend upward," Butler said. "We will see a slide in spring as we always do, but overall we will see another 5-10% price increase in aluminum over the next 12 months. It is going to continue to make it more difficult to see a profitable margin."
Rory Rehmert, newly elected chairman of the International Casual Furnishings Association, agrees with Hendrix's assessment of market conditions, especially as they relate to China. He said that China will, over time, be less interested in exports and more in domestic production as its own middle class makes its presence in the marketplace known.
"It is a moving target," Rehmert said. "We have to stay on and watch what happens and focus on the things that we can control."
As vice president of sales and marketing at Pride Family Brands, Rehmert expects his firm to be less affected than most other importers because Pride owns its foundries in Costa Rica.
Manufacturing in China, Agio President Bob Gaylord saw a price increase in aluminum during 2010, although not as dramatic as those fueled by demand pressure four years ago. As then, prices for many goods may go up as domestic demand increases and as planned power outages, intended to reduce the country's carbon footprint, slow production.
"The main factor in China is labor and a significant shortage of labor for a number of reasons," Gaylord said. "Chinese government stimulus is all about the interior, and all of the manufacturing is on the coast." Gaylord said the worldwide economic downturn forced many Chinese laborers out of work, so they moved home to the western provinces. To avoid public demonstrations, the government directed its investment to where the workers are now, which has caused them to stay - and the manufacturing labor base on the coast to suffer.
Dudley Flanders, president of Lloyd/Flanders, agreed. Because aluminum has historically been a volatile market, Flanders said he tends not to get too excited about price increases. "We try to forecast what our cost is going to be from the Chinese standpoint, but I see the cost of labor going up," he said. "Not to mention what would happen if they let the yuan float, which could be extremely significant."
Flanders said his annual price adjustment this year turned out better than expected. He doesn't know how it will turn out next year, or whether he will have to seek out suppliers in the Philippines, Indonesia or Central
America. But if prices go up on imported woven products, it will be a competitive advantage for his materials, which are made in America.
Eric Parsons, president of Gloster Furniture, said aluminum is an important part of two of his collections - and the volatility of the marketplace has prompted some changes.
"We have increased our supplier network; we've got more suppliers this year than last year as a direct result of the state of events that is occurring in Asia," Parsons said. "We need to minimize our risk and increase the possibility of delivering product in a timely fashion."
Gloster has hired a new director of procurement, who will be responsible for overseeing all of its contracted suppliers, including aluminum, in an effort to either hold the line or reduce costs for its customers.
"I think definitely that this will be a better year," Parsons said. "I say that with optimism, but it is a little bit guarded. I think everybody is approaching it in that manner. I think as long as the consumer has a high level of confidence, there is strength in the dollar and in the economy, everything will be all right."