Despite its 127-year run, Alcoa Inc. (NYSE, SWX:AA), our country’s aluminum production giant, may finally see its dominance in the sector come to an end. America’s aluminum production industry is swiftly being led to the guillotine by a burgeoning and more affordable aluminum industry in China. If the current trend of falling prices continues, experts speculate that virtually all of America’s smelting plants will shut down within the next year.
Sinking Aluminum Prices
A five-year span wherein global market prices have consistently and dramatically fallen has made it difficult for those in the aluminum industry to maintain solid footing.
The places afforded the cheapest means of production—Russia, the Middle East and China—have seen fabricators the world over clamoring for their resources. Foreign smelting plants in those regions are afforded a competitive advantage because they typically have lower labor costs, energy expenses and weaker domestic currencies than those of the United States.
An excess in the global aluminum supply has driven prices down by 27 percent over the past 12 months, making it economically impractical for many American companies to manufacture the metal for profit. Some are merely keeping factories open because they have already paid their electric bills far ahead, and might as well recoup some of their losses.
In London, prices of the metal have settled around $1,500 per tonne this year, marking a 19 percent decrease in cost in 2015. Last week, aluminum prices briefly fell to $1,460/t, the lowest in 6 years.
China, in particular, has gotten so production-happy that they have successfully driven prices low enough to the point of cutting the profits of 50 percent of global producers. Luckily for the People’s Republic, the higher physical premiums in the country continue to make aluminum production a viable economic venture.
Michael Widmer, head of metals research at Bank of America’s London branch, conceded that the demise of the American aluminum industry would be very difficult to overturn. Widmer concluded that companies would be resigned to looking elsewhere for their metals.
The recent experiences for Jay Anderson, president of Trialco Inc., a versatile smelter located in Chicago, is proof of this. Anderson now gets 80 percent of his supplies from overseas manufacturers. Speaking with Bloomberg, he said the following:
“It’s not the kind of business where we’re going to pay more and buy all American. . . It’s too competitive a business to do that.”
By Monday, Alcoa will have sold, curtailed, and closed 45 percent of its smelting capacity since 2007. At minimum, the company plans to cut a third of its domestic production as aluminum fabricators increasingly look to other sources for the metal.
Once a staple of the American economy, Alcoa is an another example illustrating a growing problem: the loss of industrial operations to more attractive manufacturing environments in China. As the trend continues, the U.S. economy will have to find ways to replace this productivity in other sectors.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.