Aluminum was trading at $1,770 per metric ton on April 10. Aluminum prices have largely traded sideways so far in April. However, other industrial metals have taken a beating this month. Iron ore prices recently crashed to a decade low, while steel prices are getting near their 2009 lows. The strength in aluminum prices is a reflection of the relative strength of the aluminum industry.
Alcoa (AA) expects aluminum demand to increase 6.5% this year. Although this is down from the 9% demand growth last year, it’s still healthy if you look at the current state of the global economy.
Steel demand could actually register a negative growth this year since the Chinese real estate industry has slowed down. Iron ore gets naturally affected, as almost all of iron ore goes into steel production. The SPDR S&P Metals and Mining ETF (XME) has invested in several iron ore, steel, and aluminum companies. It has lost ~12% of its value this year and has underperformed the broader markets (IVV).
The above chart shows the movement in aluminum prices. As you can see, they’ve traded sideways throughout most of 2015. Aluminum prices directly impact revenues of aluminum producers such as Rio Tinto (RIO) and Noranda Aluminum (NOR). According to Alcoa, its earnings go down by $190 million for every $100 per metric ton fall in aluminum prices. The converse holds true when aluminum prices go up.
Alcoa prices the aluminum from its primary segment with a 15-day lag to aluminum prices. Century Aluminum (CENX) prices aluminum with a one-month lag to London Metal Exchange (or LME) prices.
Along with spot aluminum prices, it’s crucial to analyze the movement in aluminum future prices. We’ll discuss this in detail in our next part.