Aluminum is a vital natural resource used in nearly every facet of the modern global economy. Its strength-to-weight ratio makes it ideal for use in the aerospace and vehicle manufacturing sector. Its resistance to corrosion makes it invaluable in construction and power transmission lines. Aluminum can also be found in everyday household items like televisions, furniture and kitchen utensils.
Despite its widespread usage though, aluminum has fallen on hard times along with most other commodities. The strength of the U.S. dollar and appeal of outsized gains from stocks have made commodities an unpopular choice and kept values low. How aluminum is performing can inform investors about the state of the economy and where it’s headed though.
The Global State of the Aluminum Industry
In China, aluminum is a booming industry. In September, China produced 2.75 million tonnes of aluminum registering the second highest month ever. The country accounted for more than 55% of total global aluminum output in September and prices have been soaring on the increased demand.
New ultra-low-cost capacity and aluminum production restarts in China are expected to climb by the end of the year. However, much of the revamped production is coming from government stimulus, while the actual demand curve isn’t expected to rise at the same pace.
The Chinese overproduction has hit home with many U.S. aluminum producers hurting right now. Thanks to government subsidies, Chinese companies are able to severely undercut other aluminum producers. Interestingly, if the Chinese government weren’t a factor, U.S. aluminum smelters would be better positioned relying on pure market supply and demand forces.
On a global scale, fears of a Chinese aluminum oversupply crash may be overblown. The European Commission is concerned that government subsidies are responsible for a growing overcapacity issue, but the China Nonferrous Metals Industry Association countered saying that peak consumption for Europe may have already happened, but China’s peak isn’t predicted to occur until 2020.
Increased Chinese capacity could be a good thing for the global economy though. If China’s economy is growing at a faster-than-expected pace, then it could set the tone for growth in other markets.
Aluminum is known to be a highly volatile commodity radically changing from month to month. But the aluminum industry is a diverse marketplace with varying levels of cost depending on whether a company is considered upstream, midstream or downstream. The latter, downstream, is the segment with the highest margins in which aluminum is fabricated to construct products like aircraft or vehicle parts.
Companies that don’t rely on the cost of aluminum being high to generate a profit like miners and refiners could benefit if the aluminum industry begins to stage a comeback. Contrarian investors may want to check out aluminum manufacturers whose stocks have bottomed but remain profitable.
Overall, the aluminum industry is still highly volatile indicating that the global economy hasn’t yet tipped the scale in terms of being a recognized bull or bear market.