Aluminum Looks Less Brittle
Take a six-month view of aluminum and you won't find much to be happy about even if there's not much reason to be overly concerned. The last 26 weeks have seen the industrial base metal fall by about twenty cents per pound, a figure that seems downright negligible compared with the fall of prices for gold, which now threaten to drop below $1100 per ounce again. Go a bit further back in time, however, and the drop in aluminum becomes much more frightening. The base metal has lost a third of its value in 2015 to date, putting immense pressure on miners and processing facilities that increasingly struggle to find profit in the industry. While demand for aluminum remains quite high, especially with both automotive and aerospace manufacturing hitting a high note, prices have plunged. This has caused Alcoa, one of the United States' leaders in aluminum smelting, to announce they'll cease a full 75% of their operations in order to allow prices to catch up. The Alcoa decision has all the markings of a classic consumption cycle that will benefit investors once the squeeze hits the market.
Aluminum will never have the name recognition nor appreciate of cousin metals like steel. After all, nobody's named a professional football team the "Aluminumers" (which is too bad, because that'd force Al Michaels to try to pronounce the name each Sunday) and just about everyone can crush a can of Pepsi with their bare hands. Yet steel consumption has sputtered in the past five years while aluminum has shot upwards. The vast majority of the lightweight metal goes towards manufacturing and not construction, meaning that the infrastructure and housing bubbles had little to no effect on aluminum -- other than sending its blanket value upwards with almost all other commodities. The United States uses 50% more aluminum today than it did in 2010, with projections to double the total usage by the end of the decade. Despite the doom and gloom projected about the upcoming death of the transportation industry, with the need to replace 3 million jobs once self-driving cars and trucks hit the road, these new fleets of self-driving vehicles have generated a huge new outlet for aluminum smelting. The Ford Motor Company frequently makes headlines in the aluminum world for designing a new type of vehicle with an aluminum frame or chassis or suspension; their new aluminum-frame F-150 pickup trucks account for the largest production in history of aluminum vehicles. With so many buyers, why has aluminum been hurting?
What's On Hand
Surpluses exist everywhere you can find in the commodity world, ranging from nations sitting on oil reserves to zinc warehouses to grain holdings. The problem with aluminum, at least from the producer's end, is similar to the problem with many other base metals: there's plenty of available metal to choose from. With output growing faster than demand over the course of the past half-decade, too many base metal manufacturers put their product onto a market where the customer has the option of purchasing yesteryear's metals -- or worse, waiting a few more months for the price to fall before they purchase yesteryear's metals. While Alcoa made a surprising announcement in October that their forecasts for global aluminum surpluses would drop slightly as Chinese manufacturers diminished supply, just one month later it's clear that a smaller surplus is not synonymous with a profitable enterprise. Alcoa no longer has the cash on hand to wait out the metal market and pine for a better asking price. Instead, they've proactively slashed their own output in order to transfer the pressure on the aluminum market to the buyers for the first time in years. The company announced it would idle (but not shut down) three of its four smelting facilities, meaning that sites in New York and Washington state will get mothballed until the price of aluminum back up. The consequences of Alcoa's decision should not be underestimated: this move will eliminate half a million tons of aluminum from the commodities market, decreasing the United States' aluminum output by nearly a full third. The only remaining plant in Evansville, Indiana, will churn out about a quarter of a million tons of processed aluminum for the company's customers. With aluminum sitting at six-year lows, it could be quite some time before the plants go back online and Alcoa's output starts to pick back up.
- The Takeaway: with prices trending downward, there's ample value in the aluminum market at the moment. Global industries still require increased quantities of the base metal year over year, but quite a bit of surplus needs to head out the door before demand overtakes supply. Alcoa's decision represents the tip of the iceberg given their influence in American output. Once their decision to shut down facilities by 2016 goes into effect, aluminum will begin a period of badly-needed growth. Investing in aluminum to grow over the next 12 months represents a strong opportunity to gain ground. With aluminum at such fantastic lows, furthermore, investors can get bottom-barrel prices by buying today.
- It's odd to say that some companies grow when they decide to shut down three quarters of their product output, but not all companies can determine the price of their products. Alcoa stock (AA on the NYSE, trading for $9.10 a share) has drifted steadily downward over the course of the past 12 months, making it as strong a value buy as aluminum itself. Investors who want to ride the recovery can add Alcoa stock to their portfolio as the company rebounds -- as it did between October of 2013 and 2014, when the company stock doubled despite the price of aluminum dropping by about ten cents per pound.