The demand for aluminum is declining sharply in both developed and developing nations due to the uncertainty regarding future economic conditions. Demand from two major end markets, Automobile and Construction, is expected to deteriorate further in the coming months. The LME aluminum inventory is at a record level of approximately 4.4 million tons.
Significant decline in demand along with high inventory levels is pressuring aluminum prices. Spot aluminum prices increased to $1,630 per ton in the second quarter of 2009. However, this is significantly lower than the prior-year levels.
In response to falling demand and low prices, the primary aluminum industry has announced significant production cuts in the last several months. However, we believe that the supply cuts may not be quick and deep enough to offset any potential drop in end demand amid the global economic slowdown.
Aluminum producers such as Alcoa (AA) and Century Aluminum (CENX) have reported losses in the last two quarters and are expected to report another loss in the second quarter.
Although additional production cuts are expected in the coming months, we believe the aluminum market will remain oversupplied for the rest of 2009. The demand for the metal is expected to remain low for the next couple of quarters.
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