Editor's Note: I'm very pleased to introduce Alex Koyfman, the latest addition to the Angel Publishing family. A prolific writer, Alex comes to us from a legal background in Washington DC, hungry to provide in-depth reporting on—and profit from—the great global recession.
At lunch the other day, Alex ran some of his new investment angles by me, including his new research into the global aluminum industry. To that end, I asked Alex to share some of his thoughts on the future of aluminum in today's Gold World. Enjoy.
Managing Editor, Gold World
You know the recession is profound when you pick up a can of soda and its value drops by the time you put it down.
Not the value of the soda itself, but the commercially ubiquitous, corrosion-resistant metal the can is made from.
Of course, I'm talking about aluminum.
Aluminum Prices Plummet
After hitting a high of $1.50 per pound in July 2008, aluminum prices have dropped over 50% from their peak and are hovering around the $0.67/lb mark today. Take a look at the aluminum price chart below:
A range of forces has led to aluminum's price downfall.
Aluminum is an industrial base metal which is almost universally essential in the production of consumer goods. Thus, the global economic downturn is one of the main factors in the price pullback. Demand for aluminum mill products from the transportation, packaging, and construction industries has fallen by a third since the worldwide recession began.
Another force that has contributed to the sharp decline in aluminum prices — perhaps even more than sinking demand — is overproduction, which has lead to a significant supply/demand imbalance.
Oversupply Weighs Down on Aluminum Prices
Unfortunately for aluminum bulls, the peak prices we saw in mid-2008 came at just about the worst possible time.
In response to rapidly increasing aluminum prices, China, the world's biggest producer of aluminum, put their smelters into overdrive, ramping up aluminum production by 50% last year.
Less than 10 months later, however, as the global recession depressed consumer spending, that landrush generated a vast surplus—a surplus which has pushed prices down even further.
To combat this surplus, China is scaling back aluminum production.
For 2009, the Chinese predict an increase in aluminum production of just 1.8%. This is in sharp contrast to their previous expectations of boosting production by an additional 33% over last year.
This effect is mirrored by other major aluminum producers around the world.
Klause Kleinfeld, president and CEO of the world's third largest aluminum producer Alcoa [NYSE: AA], has stated he expects at least 1.4 million tonnes to be cut from production this year, in addition to cuts already instated.
With Alcoa posting a $497 million loss in the first quarter of 2009, as opposed to the company's $303 million profit from a year earlier, such cuts may only be the beginning of a growing and enduring trend.
Across the ocean, the story's no different.
Kleinfeld's Russian counterpart, Oleg Deripaska — CEO of United Company RUSAL, the world's second largest aluminum producer — foresees a drop in global demand from 36.5 million tonnes in 2008 to 28.0 million tonnes in 2009.
With aluminum prices at a 10-year low, and with most of the world still in a surplus, Deripaska's prospects for the future rely heavily on efficiency of production.
Efficiency, he believes, is his company's only chance for remaining profitable in the coming years.
"This is due to the cost-cutting programme and restructuring of our capacity. It is all about costs. The only chance to survive is to cut costs," he states. "I can tell you 75 percent of aluminum producers are below water."
That being said, as the global economy struggles to regain its losses of the last year, Deripaska expects aluminum prices to average about $0.72 per pound for the next decade.
Aluminum Price Outlook
While Mr. Deripaska's predictions of a weak market for the next 10 years may be a bit pessimistic, the consensus is clearly grim for the short term.
Despite recent glimmers of hope for the global economic climate, aluminum's recovery — which can only come from a resurgence in demand — can be expected to lag markedly behind the overall economic upswing.
Even with a rebound, I expect aluminum prices to stay largely stagnant, growing no more than 7% over the next 12 months.
Don't Reach for the Falling Knife: Gold and Silver Are Better Bets
I recommend commodity investors stay away from aluminum-related investments despite recent price lows. A wiser strategy would be to get into precious metal-based positions, such as gold and silver.
What sets these two investments apart most is the fact that aluminum's value is derived solely from its utility in industrial and commercial applications. On the other hand, precious metals, although often valuable for industrial applications in their own right, carry an inherent monetary value.
Market forces continue to fluctuate, and the ongoing economic turmoil may decrease global demand for aluminum products. If so, the demand for materials with more stable value will rise, shifting the emphasis to metals such as gold and silver.
Recent gains in silver and gold prices support this theory, and indicate a trend that is not anticipated to end anytime soon.
Contributing Editor, Gold World
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