In the previous part, we discussed that physical aluminum premiums have corrected sharply in May. In this part of the series, we’ll analyze the recent movement in aluminum prices. Spot aluminum prices were trading at $1,750 per metric ton on May 19, dropping more than $200 per ton in the preceding two weeks.
Aluminum prices were strong for most of last year. However, the prices corrected sharply towards the latter part of the year. Prices of all metals like steel, copper, and aluminum fell as crude oil prices touched multi-year lows.
The previous chart shows the recent movement in spot LME aluminum prices. As you can see, prices have corrected sharply in the last couple of weeks. Aluminum prices were quoted at $1,959 per metric ton on May 5, which was their highest level for the current year. However, aluminum prices have plunged more than 10% since then.
Price correction is negative for aluminum producers
Lower aluminum prices are negative for aluminum producers. Noranda Aluminum (NOR) had expressed hope that aluminum prices might increase proportionately to compensate for lower physical premiums. However, it seems to be a double whammy for aluminum producers, as both aluminum prices and physical premiums have corrected.
Aluminum prices directly impact revenues of aluminum producers like Rio Tinto (RIO) and Glencore (GLNCY). As per Alcoa (AA), 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 currently forms 2.8% of the Materials Select Sector SPDR ETF (XLB).
In the next part, we’ll look at how aluminum futures are playing out.