What to Expect From the Can Market in 2018 and Beyond
18 June 2018 by Goran Djukanovic
The global demand for beverage cans will grow between 3.7 – 4% in 2018, and a similar growth trend is expected over the next five years. This growth is driven largely by increased consumption in emerging markets, most of which will take place in China, and the rest of Asia, Europe and South America. At the same time, the rest of the world it is expected to stagnate or even decrease – following decreases in the consumption of carbonated beverages.
Overall, the can stock market will experience somewhat smaller growth in next five years, of some 3.4 – 3.6% CAGR global growth, thanks to the growth in China, Asia, Europe and South America, while in the rest of the world demand is expected to stagnate or even to retract.
Next, the beverage can market in the European Union is expected to grow at a CAGR of over 4% between 2017 and 2025, owing to increased recycling activities undertaken by the European Commission, as well as the national governments of France, Germany and the U.K., according to Grand View Research, Inc. Asia Pacific is expected to register a CAGR growth of over 5% during the same period due to increased demand for carbonated soft drinks, energy drinks and sports drinks, and due to increasing disposable income. Simultaneously, demand in North America is expected to stagnate or even decrease somewhat.
Another big factor propping up the fortunes of the aluminium can market is the expected switch by China’s packaging firms to favour aluminium cans for beer and soft drinks. As a result, Rio Tinto estimates that aluminium rolled products capacity will continue to increase in China. Shares of Chinese beer makers rose after both UBS Group AG and Goldman Sachs Group Inc. issued reports saying they expected industry-wide price hikes. UBS estimates 28% annual profit growth for the sector from 2018 to 2020 as demand recovers.
Even if the packaging and can stock segments have lower demand growth compared to the transport industry, they still contribute to most of the revenues of some leading producers of rolled products. Even if packaging in particular is expected to grow at rates around or even less than that of inflation, packaging sales constituted 45% of Constellium’s 2017 shipment volume, as well as 45% of revenue. Constellium is the leading European and North American supplier of can stock, and the leading worldwide supplier of closure stock.
Demand modest but stable
Around 60% of the total amount of beverage cans is used for carbonated beverages, the consumption of which has been declining in recent years, thereby resulting in sluggish demand. The remaining 40% are cans for beer, the demand for which remains strong. A recent research showed that percentage of beer packed in aluminium cans is growing – around 58% of all beers are packaged in aluminium cans, which is up from 50% in 2010. The 8% growth came mostly at the expense of glass bottles.
Demand for can sheet, though modest compared to automotive sheet demand, for instance, tends to be less correlated with general economic cycles and short-term crisis, as recently seen with U.S. sanctions against UC Rusal.
Aluminium beverage cans represented approximately 16% of the total European aluminium flat rolled demand by volume in 2017 and 34% of total U.S. and Canada aluminium flat rolled demand, according to Constellium. Aluminium has also moved ahead by displacing glass as the preferred packaging material in certain sectors, such as beer. Between 2002 and 2017, aluminium’s penetration of the European can stock market versus tinplate increased from 58% to 86%. In recent years there is increased consumption in Eastern Europe and Mexico and growth in high margin products such as the specialty cans used for energy drinks.
North America is the biggest consumer of aluminium cans accounting for more than one-third of the total global consumption. North America is followed by European Union and Asia-Pacific.
Costs rising for North American producers
The adjusted percentage of aluminium value used in the production of cans is just above 50%. In other words, for every dollar in cans produced in the U.S., 50.3 cents is due to the cost of aluminium in some form, according to Implan. Steel has been replaced over time and today all beverage cans produced in the U.S. are made of aluminium.
According to the Can Manufacturers Institute, there are roughly 88.5 billion aluminium beverage cans and 31.5 billion steel food cans produced annually in the United States. This means that 73.8 % of the cans are aluminium and 26.2 % are made from steel. If we’re counting Canada, of the approximately 125 billion cans produced last year, 101 billion were aluminium cans.
An estimated cost of US$ 3.63 per pound equivalent of beverage cans, or about 10.7-cents per can is due to the purchase of aluminium cans by brewers. When the Section 232 10 % tariff is passed through to the can manufacturer, assuming all margins remain constant, the price for a pound equivalent of cans increases to US$ 3.96, or about 11.6-cents per can, according to John Dunham &Associates.
Production costs of rolling mills have recently increased as well, after registering falls in 2015 and 2016, due to both higher LME prices in the second half of 2017 and 2018, and higher energy prices. Scrap makes up approximately 30-35% of the total raw material mix. Raw material costs represent approximately 65-75% of a rolling mill’s total costs, therefore the total business costs are closely linked to the LME price.
During the past two years, both EU and U.S. manufacturers have switched from can stock production to the production of auto body sheet (ABS), due to higher margins in auto body sheet alloys. At the same time, can stock capacity has shifted from North America to China and Asia.
While the trend has weakened recently, can makers in North America are facing a much tighter market and may need to look for alternative offshore suppliers in the medium term, as U.S. can stock capacity is falling and imports are growing. However, while Section 232 tariffs may turn back domestic consumers to local can stock producers – after capacity restarts – users will have to count on somewhat increased prices.
Despite the fact that most aluminium consumers in U.S., including in the aluminium beverage can industry, expect significant increases of costs due to tariffs and decreases in sales and workforce, this author expects minimal influence on consumers and relatively low (insignificant) damage due to the tariff alone. However, increased aluminium premiums (a two-fold rise since the start of the year), and the all-in price of aluminium, which has been influenced by Section 232 tariffs and the recent sanctions against UC Rusal, may result in rising costs and certain loss of markets and job shedding in future. Finally, due to higher aluminium premiums, as well as steel import tariffs and other imported goods, inflation in the U.S. may also occur.