Although other base metals made new lows in January, aluminum prices held steady. The aluminum MMI fell only one point to 71.
What didn't fare well in January was Alcoa's (NYSE:AA) stock price, which fell sharply to its lowest level since March 2009.
Alcoa stock plunges in 2016 hitting a seven-year low. Source: MetalMiner analysis of @StockCharts.com.
Lower aluminum prices were the main cause driving the company's shares down over the past months. In addition, the recent turmoil in the stock markets is not helping matters. A combination of both made Alcoa's stock price plunge in January.
Rising domestic premiums help Alcoa to improve its margins. Since September, premiums in the US rose from the lows of $0.06 per lb, mainly because of the production cutbacks announced by domestic producers in Q4 2015. However, we haven't seen falling stockpiles, and we'll probably not see a major bounce back in premiums. Indeed, over the past couple of months, they have stabilized around $0.09 per pound.
There are a few factors preventing premiums from rising much more. First, some of the proposed cutbacks have been partially rolled back. Alcoa previously announced the closure of its Intalco smelter in Q1, but now, the company will keep it running until the end of Q2. Century Aluminum (NASDAQ:CENX) is running its Mount Holly smelter at half capacity despite its previous announcement of a complete shutdown.
In addition, domestic aluminum producers will find it hard to succeed in increasing their premiums while global sentiment remains negative. Despite the relative scarcity of material created by domestic producers, there is still a glut of material elsewhere in the global markets. Finally, any significant increase in domestic premiums would attract more imports into the country, especially coming from China.
The main problem with the aluminum industry is that smelters in China keep running and refuse to cut production. The other problem is high inventories. Even though official London Metal Exchange inventories have been trending lower since mid-2013, unofficial stocks have actually increased. According to CRU, global aluminum inventory, including unofficial stocks, stands at around 15 million metric tons.
Moreover, China wants to keep stockpiling instead of cutting production. In January, the top aluminum smelters in China agreed to form a joint venture to stockpile aluminum. These measures will only keep Chinese smelters producing more aluminum, while material only goes into financial deals. However, the market knows what China is up to, and investors won't buy aluminum until shutdowns happen. The stockpiling game will only keep prices low for longer, potentially making the problem even worse once aluminum enters the supply chain.
While China doesn't change its approach, the best aluminum producers can hope is for prices to stay at current levels.