Alcoa’s Outlook Dampened by Aluminum’s Weak Fundamentals

Alcoa’s outlook

Alcoa (AA) saw negative price action of 2.0% yesterday, and the stock is now down 8.0% for the month. It has lost 7.4% year-to-date while Century Aluminum (CENX) has lost 1.8%. While the entire metals and mining space has come under pressure this month, aluminum has looked vulnerable for the last few months.

Alcoa’s Outlook Dampened by Aluminum’s Weak Fundamentals

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Firstly, from a demand standpoint, the global automotive industry is seeing a slowdown in sales. The automotive space is among the leading aluminum end consumers. Strong demand from automotive companies was a key driver of aluminum’s solid demand growth over the last decade. Falling vehicle sales are taking a toll on global aluminum demand growth.

Chinese aluminum exports

Secondly, on the supply side, while Chinese steel exports have come off their highs, the country’s aluminum exports are booming. China’s unwrought aluminum exports rose 10.4% year-over-year in April. In the first four months of 2019, China’s unwrought aluminum exports have risen 13% from the corresponding period in 2018. Last year, China’s aluminum exports had surged to a record high.

Also last year, President Trump imposed a 10% tariff on US aluminum imports. During the company’s first-quarter earnings call, Alcoa’s CEO, Roy Harvey, said, “Tariffs have not solved the industry’s challenges, which stem from highly subsidized smelting capacity in China, that has resulted in surplus production.”

While the global aluminum industry is expected to be in a supply deficit this year, there’s ample aluminum availability in warehouses, which is depressing prices. Overall, aluminum’s supply and demand equation looks weak amid slowing demand growth and rising Chinese aluminum exports.