Alcoa Curtails Production Capacity on November 2: Investor Takeaways

(Continued from Prior Part)

Aluminum prices are a key driver for aluminum producers, including Rio Tinto (RIO) and Aluminum Corporation of China (ACH). The graph below shows the recent movement in aluminum prices.

On November 2, 2015, spot aluminum closed at $1,463 per metric ton on the London Metals Exchange. Spot aluminum prices were down more than 7.5% in October.

As discussed in Part 1 of this series, Alcoa (AA) plans to take out more than 500,000 metric tons of aluminum supply by the next quarter. Base metal (DBB) producers have been shelving their high-cost capacities in a bid to remain competitive in the current low price environment.

In copper, Freeport-McMoRan (FCX) and Glencore (GLNCY) have announced major production cutbacks. This seems to have some impact on copper prices. However, it’s a different game for aluminum.

For copper, the issue is more of a demand-side concern led by the Chinese slowdown. However, for aluminum, the biggest worry is the huge amount of aluminum leaving the Chinese borders every month. The steep rise in Chinese aluminum exports has subdued the spirit in the global aluminum markets.

Solely from a demand perspective, aluminum looks well placed compared to other industrial metals. Alcoa expects global aluminum demand to rise 6.5% year-over-year in 2015. However, even strong demand fundamentals aren’t enough to support aluminum prices. Chinese aluminum exports seem to have taken the sheen off aluminum.

Alcoa’s supply cuts might have some impact on aluminum prices in the short term. However, any major upside in aluminum prices currently looks dim. If aluminum prices start to rise, Chinese aluminum exports might rise again, putting pressure on aluminum prices.

However, physical aluminum premiums might get some support from Alcoa’s latest move. We’ll discuss this in more detail in the next part of this series.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Can Alcoa’s Latest Production Cuts Restore Supply Balance?
• Part 3 - How Aluminum Premiums Could React to Alcoa’s Curtailments
• Part 4 - LME Aluminum Inventories Have Been Sliding since 2013