Fed’s December meeting
The next meeting of the US Federal Reserve is scheduled for December 15–16, 2015. It will be the Fed’s last meeting in fiscal 2015. But does the meeting have any significance for investors in aluminum companies such as Alcoa (AA) and Century Aluminum (CENX)? Let’s see.
Higher borrowing costs
The Fed has held its policy rates near zero for almost six years, as you can see in the graph above. If the Fed raises rates in its December meeting, it could mean higher borrowing costs for all companies.
Mining companies’ balance sheets are already stretched. Century Aluminum’s and Alcoa’s aluminum operations had GAAP (generally accepted accounting principles) losses in 3Q15. Aluminum prices have only weakened since then. If borrowing costs rise, which they could in the event of a federal rate hike, things could become even more challenging for aluminum producers.
Rising interest rates could also impact aluminum financing deals. These financing deals basically involve buying the near delivery while making a forward sale. The low-interest rate scenario globally pushed a lot of investors and arbitrageurs to this market. Read A key guide to understanding the aluminum industry to find out more about aluminum financing deals.
Rising interest rates could lead to higher borrowing costs for traders in such financing deals. This could lead to the unwinding of these transactions, pushing more aluminum into the markets. Although official LME (London Metals Exchange) aluminum inventories have been falling, the unofficial stocks have actually been rising. A lot of aluminum is held by traders in warehouses that aren’t registered with the LME.
If the Fed does not raise the interest rate, markets could read it as a sign of slowing growth. In the Fed’s last meeting, it didn’t raise the rate, but the commentary on slowing global growth took its toll on all commodity shares. Investors in mining companies such as Rio Tinto (RIO) and South32 (SOUHY) should closely track the outcome of the Fed’s December meeting.
In the next part, we’ll explore what other factors could drive Alcoa in December.