Aluminum – A Short Term Bubble or the Real Thing
Aluminum pricing has continued on the upward trend begun in late 2013 and frankly has moved further than we had anticipated. While we are quite bullish on the space and have written positively in both the metal and Alcoa, we have not expected the price to move as quickly as it has so far this year – see chart.
Demand is increasing rapidly and pricing in 2013 dropped far enough to make it very difficult for all but the very best to generate positive cash flow. Consequently we expected supply curtailments to help pricing bounce off the bottom. What we have not seen, and this may represent a near-term risk, is a supply response to the higher recent prices. We would have expected some operating rate increases and perhaps some plant restarts, particularly in China, and it is not clear that this is occurring – yet. Chinese exports of Aluminum parts continue to trend upwards, suggesting that global demand continues to grow and perhaps this is enough on its own to keep Chinese operating rates high enough to prevent price competition – it is not clear how robust China domestic demand growth has been year to date but it is possible that this has soaked up much of the China surplus.
If this is the case the only supply response can come from outside China – from facilities shuttered by western producers as prices fell. We would not expect this to happen until prices have both moved higher than they are today and have either shown some consistency or accelerated because of real shortage. In either case prices have much further to go and Alcoa can keep appreciating from here.
The risk is that there is a China supply response waiting around the corner. Our guess would be that if it coming it is imminent and if we do not see it by the end of the summer we have a sustainable broad market recovery in front of us – as much as 12-18 months earlier than we had originally expected.