There’s no doubt commodities stocks have suffered, but few industries have struggled like the aluminum metals and mining segment. The most glaring indicator of the difficulties in this industry was most recently displayed by Alcoa Inc.’s (AA: 10.94, 0.00 (0.00%)) horrid earnings. There couldn’t have been a “better” way to start the S&P 500 earnings season than to report a 52% drop in net income. With that said, a lot of the death and destruction has been priced into this industry and many companies are trading at trough multiples. Don’t be fooled by these metrics, aluminum will not be turning around soon.
The Market
Aluminum has been a continuously consolidating market. As of 2006 six companies operated fourteen primary mines and five major smelters. In 2006, RUSAL and SUAL of Moscow along with Glencore International of Swtizerland merged to create United Company RUSAL, the world’s largest aluminum company with a primary capacity of approximately 4 million metric tons per year. State-controlled Aluminum Corporation of China (Chalco) acquired several smelters in 2006 in an effort to consolidate primary aluminum smelting capacity. In North America, Alcoa Inc. accounts for over 50% of all aluminum production. China, Canada, Russia and the United States account for nearly 60% of global production. At the end of 2007, total world production stood at 38 million metric tons, up from 33.7 million metric tons in 2006.
What Happened?
The culprit of aluminum’s demise is most certainly the downturn in consumer auto sales and other transportation vehicles. In the U.S, the main uses for aluminum were transportation (34%) and containers and packaging (20%) in 2007. Aluminum is the second most used metal in the manufacturing of passenger vehicles in North America, averaging 145kg per vehicle. Last time I checked, October sales plummeted for Toyota (TM: 65.51, 0.00 (0.00%)), GM (GM: 2.92, 0.00 (0.00%)), and Ford (F: 1.80, 0.00 (0.00%)) by 23%, 45%, and 35% respectively. Auto sales growth in China will slow to a screeching halt in the second half of 2008 to single digits.
