Alcoa (AA) counts the aerospace and automotive industry as its two growth pillars. Car sales have been strong in China, the US, and Europe. For instance, China’s passenger car sales rose 26.6% YoY (year-over-year) in August. This is the fourth consecutive month that car sales have grown by double digits in China.
Notably, China’s car sales have been boosted by the sales tax cut announced last year. Some analysts expect that China will extend the tax cut to next year. If the tax cut isn’t extended, we could see some moderation in the country’s car sales. Even with the tax cut, we might not see big year-over-year spikes next year. Some consumers might have preponed their car purchases to the current year.
US automobile sales could also see stagnation if not a slowdown next year. Some analysts expect car sales in Europe to also moderate next year after two years of rapid growth.
Impact on Alcoa
After the split, Arconic would supply sheet products to automotive companies. Constellium (CSTM) also supplies sheet and extruded products to automotive companies. If we see moderation in car sales in Europe and the US, it could have an impact on both of these companies. Since the automotive sector is one of the leading aluminum consumers, stagnation in car sales could impact primary aluminum producers (XME) including Rio Tinto (RIO) and Century Aluminum (CENX).
Supply side challenges
Having said that, more than a slight moderation in demand, the possibility of rising supply from China is a bigger threat to the aluminum industry. So far, Chinese aluminum production has been muted as some of the smelters in the country curtailed production due to lower metal prices. If we see a sustained recovery in aluminum prices, some of the idled capacity could come back online and pressure prices.
Global overcapacity is one of the biggest challenges for the aluminum industry. Read Aluminum Supply: Chronic Overcapacity Is Here to Stay to learn more.
Meanwhile, Alcoa’s split could be the key price driver this year. Read Alcoa’s Split: Do the Benefits Outweigh Short-Term Challenges? to learn more about the split.