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Aluminum Hits a Fresh Six-Year Low: Will Alcoa Follow?

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Aluminum down on October 26

Alcoa (AA) closed at $8.77 per share on October 26, 2015, down more than 4% from its previous day’s closing. The stock has corrected ~20% since October 8. This includes a 6.8% correction in its share price on October 9 when the markets gave a thumbs down to its 3Q15 earnings. After the markets digested Alcoa’s 3Q15 financial results, the downside in Alcoa’s share price resumed as aluminum prices continued to head south.

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Aluminum prices fall

Spot aluminum closed at $1,442 per metric ton in the London Metals Exchange on October 26. This is a fresh six-year low for aluminum. Prior to this, spot aluminum made a closing low of $1,496 per metric ton on August 24.

In another series, we noted that aluminum looks the weakest in the base metals space (DBB). Copper and zinc have managed to stay above their six-year lows on supply cuts announced by companies such as Glencore (GLNCY).

However, aluminum companies don’t have that privilege. Years of supply cuts by major aluminum producers failed to restore the desired balance in the market. Aluminum production cuts by companies such as Rio Tinto (RIO) and Century Aluminum (CENX) have been counterbalanced by growing Chinese exports.

Aluminum demand strong

Having said that, aluminum demand is stronger than most other industrial metals. According to the World Steel Association, global steel demand is expected to fall 1.7% this year compared to 2014. Falling steel demand would mean lower demand for iron ore as well.

For copper, the International Copper Study Group expects global apparent refined copper demand to fall 1.2% year-over-year in 2015.

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 of aluminum.

Alcoa’s 3Q15 earnings came in worse than average market expectations. In the next part, we’ll explore how Century Aluminum’s 3Q15 earnings could play out.

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