A number of factors, including the ongoing the European debt crisis and unresolved impediments in the United States has weighed on aluminum markets recently. In addition, concerns of slowing economic activity in China have come to the forefront with industry behemoth Alcoa (AA – Free Alcoa Stock Report), the International Monetary Fund, and mining giant Rio Tinto Group (RIO) tempering growth expectations for the world’s biggest aluminum user.
Despite these deterrents, aluminum prices have held-up relatively well. Since falling to $1,800 per ton on the London Metal Exchange in August, the metal has recovered some ground and is currently approximately $2,000 a ton. The rally being experienced is probably due to a decision by the Federal Reserve Bank to commence another round of quantitative easing. Elsewhere, the European Union and China have taken steps to inject liquidity into their own respective systems. But with supply/demand dynamics unfavorable, the rebound may well be unsustainable.
Since falling to a recent low in late 2011, improvement in the U.S. automotive industry has led to resurgence in domestic demand for the metal. Some of this momentum, though, has been mitigated by a sequential decline in durable goods orders in recent months. What’s more, with the U.S. accounting for a minuscule 10% of global consumption, it lacks the wherewithal to single handedly lift global aluminum markets. Instead, overcapacity and tepid demand in parts of Asia and Europe continue to loom large.
The European Union consumes approximately half of all the aluminum produced outside of Asia. Demand for the shiny metal in the region is down nearly 10% for the year, with consumption being especially weak in the Netherlands (down 65%), Italy (23%), France (16%), and Spain (13%). Austerity measures are being, or have been, implemented in these countries, as well as in other euro zone members, suggesting aluminum markets will continue to experience sluggishness. Notably, government budget cuts and tight lending standards have restricted spending, hurting construction markets that are responsible for 25% of Europe’s total consumption.
According to Alcoa, nearly three million tons in capacity have been removed or idled globally year-to-date, with a lion’s share of production curtailments occurring in China. Many of that country’s mills are purported to be unprofitable below $2,000 a ton. If the metal’s prices remained below this level for a prolonged period of time, additional smelters in the world’s biggest aluminum market would be shuddered. One caveat, the government has previously emphasized maintaining employment in the aluminum sector, making fundamentals a secondary concern. Accordingly, political intervention could slow the market’s healing process.
We are more optimistic about Alcoa’s long-term prospects. Tightening environmental standards are forcing auto manufacturers to come up with innovative solutions. The most promising technologies in lightening vehicles are carbon fiber, high-strength steel, and aluminum. While steel is the cheapest option, it does not nearly offer the same weight savings as Aluminum. Too, aluminum is proving to be superior in crash tests. Carbon fiber is light and strong, but is prohibitively expensive. On balance, aluminum is gaining traction. In fact, Alcoa Chairman and CEO Klaus Kleinfeld maintains an outlook in which global demand will double between 2010 and 2020.
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At the time of this article’s writing, the author did not have positions in any of the companies mentioned.