Aluminum’s long-term outlook
In the long term, aluminum demand looks strong globally as well as in China. Moreover, aluminum has been able to find new uses, especially in the automotive sector where some automakers like Ford (F) have been shifting to aluminum to reduce vehicle weight. The graph below shows aluminum’s increasing use in vehicles. Alcoa (AA) and Constellium (CSTM) supply aluminum products to the automotive industry. Currently, Alcoa forms 5.5% of the SPDR S&P North American Natural Resources ETF (NANR).
However, demand from the packaging sector has been growing at a tepid pace. Ball (BLL) supplies packaging materials to different industries. While carbonated drink sales in the developed markets have been on a decline, growth in the major emerging markets has moved to single digits after years of rapid growth. However, a shift from glass bottles to aluminum cans in countries like India could work in aluminum’s favor. Similarly, beer cans have been gaining in popularity in some countries over the bottled versions.
The short term
In the short term, there is a lot of idled capacity that might come online if aluminum prices rise in a sustained way. And it’s not only the capacity in China that we are talking about. Producers elsewhere might look at restarting their idled plants if aluminum prices rise. It’s important to note that most of the aluminum smelters have been idled because of their high-cost operations rather than a lack of demand. Therefore, if aluminum prices rise, some of the idled capacity would again become economical to operate.
The long term
On the positive side, China’s aluminum overcapacity will balance out much sooner as compared to steel. Unlike steel, where Chinese demand has likely peaked, aluminum demand continues to grow in the country. If China does not make big additions to its aluminum smelting capacity over the next four to six years, we could see normalcy return in aluminum markets. The current aluminum price environment is not supportive of building greenfield capacities.
The fact that Chinese demand has likely peaked is steel’s biggest worry. In the next part of the series, we’ll explore what other factors plague the global steel industry.