Aluminum prices are a key driver of aluminum companies’ earnings. Aluminum producers’ revenues—like Alcoa (AA), Rio Tinto (RIO), and BHP Billiton (BHP)—are tied to the LME (London Metals Exchange) aluminum prices. So, when aluminum prices correct 12% in a single month, investors have a valid reason to worry.
Lower aluminum prices also negatively impact ETFs investing in aluminum companies. The SPDR S&P Metals and Mining ETF (XME) has ~10% exposure to aluminum plays. Reliance Steel & Aluminum (RS) forms 4.16% of XME.
The above chart shows the recent movement in spot LME aluminum prices. On May 29, prices traded at $1,701 per metric ton—slightly short of the physiological $1,700 per ton mark. In May, spot aluminum prices lost 12% of their value. This was the worst monthly performance in the last several years.
Currently, LME aluminum prices are trading at their lowest levels since March 2014. Please note that in 1Q14, aluminum prices took a severe beating as new LME warehousing rules were about to be implemented. The change in regulation would have been a blow to aluminum companies’ profitability. Realizing this, Rusal—the world’s biggest aluminum producer—filed a lawsuit in a United Kingdom court. The court halted this key reform initiated by LME and ruled in favor of Rusal. Aluminum prices rallied after the court ruled against the new rules.
Later, LME won the court case and the new warehousing rules came into existence earlier this year.
Basic materials sector
May hasn’t been the best month for the basic materials sector. Copper lost ~2.5%, while iron ore prices traded sideways. Aluminum has been among the worst performing commodities in May.
Have aluminum prices reached the bottom yet? We’ll discuss this in more detail in the next part of this series.