Sign of the times

Dec. 3, 2015
Alcoa’s decision to shut down smelting plants should not affect wheel prices

Truck tire manufacturers and retreaders have struggled to compete with low-cost offshore imported products for years. In the beginning, the differences in product quality were enough to keep most of the major fleets from taking chances with little-known brands, but the gap has been closing over the past decade or so, which means the market is changing.

With the recent announcement from Alcoa regarding the closing of several aluminum smelting plants in the U.S., the doomsday theorists will be lining up to warn everyone that it’s another sign of weakness in the economy. They will completely disregard the fact that Alcoa has reduced domestic smelting operations by 45% since 2007 and that U.S. aluminum production as a whole dropped from 2.5 million tons in 2005 to 1.6 million in 2015. The reasons are plentiful and range from the lack of significant North American bauxite reserves (the key mineral used for smelting aluminum) to the environmental impact of the entire process.

But the most important factor that appears to be signaling the end of domestic aluminum production is cost. The magic number for U.S. smelters is $1,500 a ton. If the price of aluminum falls below this Mendoza Line, then it is no longer profitable. Recent global prices have consistently been around or below that number, so it looks like Alcoa is going to be the first one to pull the plug and single-handedly cut aluminum smelting capacity in the U.S. by a whopping 31%. 

Outside of the local effects related to the job losses, it’s unlikely that anyone else will even notice the difference. China already accounts for 55% of global aluminum production, which is up 24% since 2005, and it is the second leading producer of bauxite behind Australia. When you put everything into perspective, domestic bauxite mining and aluminum smelting operations combined in the U.S. still account for less than 1% of the global market.

In November 1987, the major world players in the aluminum market were countries like the U.S., Venezuela and Spain. Prices were around $1,680 a ton but just seven months later, the price shot up to $3,580 a ton, and industry experts were expressing concern because global production capacity was running at 96%. By June 1989, the price had fallen back to $1,910 a ton and hit a low of $1,100 a ton in December 1991.

Fast forward to the past decade or so and China and Russia are now the leading producers of aluminum. In July 2008, the price of aluminum peaked at $3,070 a ton only to be followed by a low of $1,340 a ton in February and March 2009. That’s the type of volatility that will make any shareholder a little concerned about the long-term investment associated with aluminum production. On top of that, China continues to increase production even though it is operating at overcapacity because jobs and economic growth are more important than profit margin. They are still making money at $1,500 a ton, so Alcoa’s decision to close plants is good news for the aluminum market in China and Russia.

With minimal natural resources, increasing environmental pressure, and growing dependence on cheap energy, it was just a matter of time before domestic aluminum production imploded; however, the price and performance of aluminum products that are manufactured in the U.S. (like truck wheels) should not be affected. Wheel companies like Alcoa will just source their raw material from another country where bauxite, cheap labor/energy, and government support are readily available, making aluminum more profitable to produce.   

Kevin Rohlwing can be reached at [email protected]

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