Aluminum prices are the key driver of aluminum producers’ earnings. Although shipments and cost control initiatives often impact earnings, the biggest impact generally comes from commodity prices (RIO) (DBC).
Aluminum prices have been strong in 2017 and have built on 2016 gains. As of May 17, aluminum has risen ~11.0% this year. This rise was preceded by a 13.4% rise in 2016. Aluminum has outperformed other base metals like copper and zinc in 2017. While aluminum prices have shown strength in 2017, it would be naïve to assume that the Trump effect has been the sole driver.
The key driver of aluminum prices this year has been expectations of higher demand and lower supply. Some aluminum producers like Alcoa (AA) and Norsk Hydro (NHYDY) lifted their aluminum demand forecast during their 1Q17 earnings calls. Optimism about China’s capacity curtailment has driven aluminum to higher price levels. Notably, China’s publicly announced policy of cutting its excess steel capacity had a positive impact on steel prices also.
With the Trump effect waning, investors should watch China’s proposed capacity cuts. While the country has publicly stated that it intends to shut down its excess industrial capacity, its aluminum production and exports figures don’t exactly look in sync. While Chinese aluminum production has registered a yearly increase in the first four months of the year, its unwrought aluminum exports are similar to last year’s level during this period.
While aluminum prices are showing strength, US-based aluminum producers (CENX) have come under selling pressures recently. We’ll look at the possible reasons in the next article.