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Aluminum Plays Exercise Restraint And Deliver The Goods In 2014

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Superior returns

In the first part of this series, we learned that most aluminum plays delivered superior returns in 2014. The year, however, did not witness a broad-based rally in metal shares. Steel and iron ore companies had a horrid run on the stock markets. Rio Tinto (RIO) and BHP Billiton (BHP) are some of the big iron ore miners. Both companies are also among the top ten aluminum producers.

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Diverging performance

To a large extent, the fortunes of steel and iron ore companies are dependent on China. The slowdown in the Chinese economy has led to a steep increase in steel exports. Indeed, Chinese steel exports may hit a record high this year. The chart above shows the trends in China’s GDP (gross domestic product). For more about the slowdown in China, read Global factors drag down US steel plays.

Excess production

Iron ore prices fell by more than 45% in 2014. This happened because of production increases by big iron ore names. Production has been rising, while demand from China has been stagnant. China is the largest importer of iron ore in the world.

When it comes to aluminum, there’s been a lot of discipline exercised by major aluminum plays. Like the iron ore sector, the aluminum industry also suffered as a result of over-production for nine years in a row. However, over the last few years, all the big names reduced production capacity.

Alcoa (AA) has reduced its smelting capacity by ~30% since 2007. As well, Century Aluminum (CENX) isn’t considering adding to its smelting capacity. Currently, both are part of the SPDR S&P Metals and Mining ETF (XME).

China’s Role In Global Aluminum Markets  isn’t as significant as it is in the steel and iron ore industry.

In the next part of this series, we’ll learn what awaits aluminum plays in 2015.

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