I know Alcoa (AA) is still struggling the same way it has been for the last 18 months. Taking a realistic look at what this company needs to recover, I see two things: the prices of aluminum to increase and a strong economic recovery. Let's take a look at the price of aluminum as well as how the company is doing. Let's see if there's any light at the end of the tunnel for them.
Poor Economic Rating?
Alcoa and General Motors Corp (GM) are the only companies that are Dow members, rated by Moody beneath investment grade since at least 1980. Recently Alcoa was the second junk-rated Dow Jones Industrial Average company in last three decades.
The rising aluminum production in China has lead to an excess in supply and all but destroyed the company. It has little share price left compared to what it used to be. Back in 2004 about this time, the stock was trading at $33.00 and today it is but a shadow of that price at $8.27. Alcoa's income for four straight quarters has reduced, and 2012 net income was lower than a tenth, what it was five years earlier.
China Production of Aluminum
Presently China is the world's largest producer of aluminum and recently stated it has an overabundance of the metal. It will take companies cutting back 4 to 5,000,000 metric tons of production just to have what it calls a "manageable" surplus for the next five years. China has doubled its aluminum production in the last eight years.
If that isn't a big enough problem, it has been estimated that in 2013 the global production for aluminum will be about 50.8 million tons which should exceed demand by 1.2 million tons. This will continue to keep prices low. Last year production was exceeded by 900,000 tons producing the sixth straight year of surplus. This has been projected to continue clear through 2018.
Aluminum Prices Are Depressed Everywhere
Alcoa is not the only aluminum-oriented company struggling, it is a global phenomenon. Look at these statistics:
- About 28 percent of European Union aluminum capacity is breaking even
- 25 percent of European smelting capacity is not breaking even
- Production equaling 4.6 million tons in the world excluding China is currently operating at a loss
Seeing an end to this global problem is no easy task. Jorge Vasquez is a managing director at Harbor intelligence, which follows aluminum, and this is what he had to say about solving the problem:
"Having a balanced market after six consecutive years of surpluses and having this balanced market in a context of unprecedented inventory levels doesn't really change the situation. We will need a structural change that translates into a meaningful reduction in inventory levels and a meaningful deficit for the psyche of the market to change."
This will be no easy task, and it is the environment that Alcoa is dealing with on a global scale. When China entered the market, it started to cause problems for the aluminum industry as a whole. All the production that the nation has been showing has had to have an adverse effect upon the price of the metal. Alcoa's market share dropped in a decade from 15% in 2002 to 29.1% by 2012 as production in China quadrupled to 19.7 million tons per year.
The reality of the industry points to Alcoa having a difficult time making a real profit because of the depressed aluminum prices. Last year, 13% of its smelting capacities were mothballed and this year, the company is looking at another 11%.
As I look at this weekly chart, there is no doubt that the company has been in a long-term slump for almost 18 months and it doesn't look like it's going to end anytime soon. As highs continue to get lower, the RSI indicator can barely push through the 50 point when it does reach highs. The MACD indicator has been moving up slightly but it has not yet reached the zero line. On the highs though we have a positive convergence taking place, but it stands alone so doesn't have a lot of strength. The Bollinger bands don't tell us much either except that the stock continues to consolidate on weakness. These are long-term observations and I don't see it ending in the near future.
Although I think Alcoa is a good company, it looks like aluminum prices are going to be suppressed for some time to come. Because of this, I don't see the aluminum company having any great extended moves up. The only thing I could possibly see that would help the company increase its value substantially would be a strong economic recovery, but we're not there yet.