Aluminum has lost most of its 2014 gains.
Punished by a strong dollar and a bearish commodity environment, once-strong aluminum is finally faltering. Not only are aluminum prices falling, but the stock prices of aluminum-related companies are suffering significant declines, suggesting that investors are turning bearish on aluminum.
In the chart above, we see that the Dow Jones US Aluminum Index (tracking major aluminum producers) topped after a nice run in 2014 and it’s now breaking downward. Many of the stocks comprising the index are pointing down.
Stock Prices Falling
Alcoa Inc. has fallen 25% since its last peak. The largest US aluminum producer also announced layoffs last week as it continues to reduce its dependence on primary smelting and invest more in value-added products.
The price of crude oil continues to be a problem for all commodities and, although it has performed better than most base metals, aluminum is no exception.
It’s a precarious time for aluminum companies. UC Rusal has had to pay high legal costs for the lengthy London Metal Exchange warehousing fight last year and Venezuela’s Venalum can no longer guarantee the quality of its products.
Stock to Aluminum Price Correlation
There is a high correlation between aluminum prices and the stock price of aluminum companies. As aluminum fundamentals improve, the price of aluminum surges and that means more revenues for aluminum producers, causing an increase in their stock prices. This happened last summer.
On the other hand, aluminum stock prices decline when expectations of lower aluminum prices rise. This seems to be happening right now. Although aluminum is holding its value better than most industrial metals, we could see aluminum prices falling to new lows this year, as aluminum equities keep losing the value of their shares.