The US and Europe are experiencing a temporary reduction in aluminum production due to the dip in demand. Leading producers such as Novelis, Hydro, Arconic, and Aleris have reduced production, which is largely due to their involvement in the automotive and aerospace industries. Following Section 232 duties, US production had short-term relief to safeguard its domestic producers, but the COVID-19 outbreak in Q1 has created yet another challenge. In India, Nalco, Vedanta Ltd, and Balco have reported marginally lower production of 2-5% for Q4 FY2020, according to industry sources.
Current Challenges in the Aluminum Industry:
- Inventory buildup creates pressure on working capital: Inventory losses due to the drastic drop in index prices and higher competitive intensity to exhaust the inventory built up in the last quarter are key challenges many producers need to overcome in the next few quarters.
- A slowdown in construction due to halt in projects: COVID-19 has created a cascading impact on production outputs of aluminum billets which is a primary feedstock to produce extrusion.
- Supply chain and logistics impact: Australia is a major sourcing hub for bauxite. Due to the lockdown and the halt in bauxite mining, there is an acute feedstock shortage. This impacts a few select smelters who depend on imports.
- Halt in automotive production: Due to the lockdown across many countries, automotive shipments were significantly impacted in March and April 2020. Overall Q1 and Q2 component requirements will be impacted.
Technologies that Could Prevent Business Disruption in the Aluminum Industry:
- Industry 4.0: Technologies include advanced automation technology and smelter technology. Robotics integrated into aluminum smelters and cast-house operations eliminate the use of human capital and also avoid unsafe material handling.
- Process control improvements: Automation and data from the shop floor and production units are captured based on real-time machine learning and artificial intelligence to enhance/optimize process control.
- Use of In-house-smelter technologies: Aluminum smelters have state-of-the-art facilities with a mix of automation and human interference where applicable and needed.
Emirates Global Aluminum, one of the world’s leading aluminum smelters, designs, models, tests, and optimizes technology in-house. Its patented DX+ Technology available for the Aluminum industry offers current efficiency, reduced energy consumption, and increases environmental performance, with the added advantage of higher productivity at a lower capital cost per installed ton of capacity. According to company sources, a 1% reduction in cost can yield benefits of up to $4 million to $5 million in the Aluminium smelter potholes alone for every 1 million tons of primary aluminum produced.
Growth Opportunities Critical for Success in Light of COVID-19:
- Multiple supply chain alternatives for shipments: Create strategic marketing tie-ups with competitors to utilize their marketing base in less-affected COVID-19 regions. Off-load the inventories, thereby reducing inventory cost and ensuring the reduction of working capital. Producers should consider alternative sales channels, such as traders and new potential end-users.
- Higher Emphasis on Essential End-use Sectors: Key sectors like power and packaging are essential for the smooth functioning of any economy. These sectors should be serviced and products should be shipped to them.
- Alternative Sources of Raw Materials: Critical primary feedstock like bauxite for the alumina refinery or alumina that is a direct feed to smelters, is crucial to run the smelter operations. Alternatives are critical as a stoppage in primary aluminum production results in decreased productivity and higher loss to the unit.
- Ramp Up Recycling Initiatives: Aluminum requires up to 95% less energy than primary production. Due to the shortage of virgin aluminum, aluminum scrap can be procured locally or imported from net exporting countries to keep the plants operational until COVID-19 is under control. Many producers are adopting this strategy to expand their operations with limited Capital Expenditure (CAPEX) rather than investing in primary aluminum CAPEX, which is significantly higher.
COVID-19 Response Strategies:
- In the current scenario, use hot metal to make use of energy (gas and power) to produce high value-added products (VAP) instead of producing voluminous lower VAP.
- Utilize recycled aluminum scrap to re-melt billets to ensure reduced dependency on bauxite/alumina.
- Inventory management of raw materials and consumables will be key. Start a special task force to monitor the price movements of raw materials and be in constant contact with suppliers for stock and volume availability.
- Mitigate risk by hedging London Metal Exchange (LME) since the LME cash Q1 volatility applies to both smelter and downstream industries.
- Drive downstream production in each country to keep VAP in inventory. Lower the power rating to reduce production with other fixed costs in operation.
- Target markets that aren’t heavily impacted by COVID-19, have recovered or have attractive commercial terms to gain potential clients. Alternatively, enter new market territories to have a wider base to mitigate the short-term risk of COVID-19.
- Build leaner organizational structures with a commitment to investing in automation, continuous improvement efforts, and employee training.
Work Done by Frost & Sullivan on COVID-19:
To know more about Frost & Sullivan’s analysis on COVID-19 from across the globe, visit: https://www.frost.com/insights/COVID-19/.
Should you have any queries on the impact of COVID-19 across industries, need more information, or would like to schedule an interview/interaction with our spokespersons, please email Srihari Daivanayagam at Srihari.Daivanayagam@frost.com.