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Aluminum Markets Act as Economic Warning Sign

by | Oct 1, 2019 | industry news | 0 comments

The last time that aluminum demand contracted, unwanted metal started pouring into warehouses and the financial crisis was looming. At that time, it took over a decade for the glut in materials to be depleted. Once again, markets are expecting a fresh increase in inventory levels as global demand slows down almost completely.

Aluminum has fallen to the lowest point in almost three years as decreased growth and the ongoing trade war between the U.S. and China continues to stand in the way of demand for everything from planes and cars to soda cans. Although stockpiles that are actively tracked by the London Metal Exchange have fallen to their lowest levels since 2007 recently, reports have come in suggesting that inventories are growing as consumers are realizing they have more material than they know what to do with.

Traders in the market are bracing themselves for a possible rebound effect in response to the weakest growth in demand in a decade, and a growing trend of delivering material to warehouse stockpiles. The possibility remains, however, that the increase in supply can still be steadily addressed by the large producers who would spend more in the long term to shut down production lines than they would to simply produce more than is needed during this decrease in demand.

What the Future Holds

According to experts who are closely monitoring market trends, a further downturn going into next year is expected, as their analysis suggests that the market has yet to reach the bottom. Opinions vary on where the market is headed, but based on analysis of key sectors such as the European car industry, annual demand for aluminum may be teetering anywhere between 2% global growth, and a possible decline of 1.2% or less. If accurate, the prediction of a decline in the market would mark the first time since the financial crisis that the market has shifted into this territory. 

Today’s Demand

Currently, demand for aluminum remains higher than it had been during the crisis ten years ago, but many traders are becoming concerned about the potential for rapid shifts in the physical market as the industry continues to slip away from its peak growth rates. As the price of raw aluminum continues to fall and draws closer to their lowest rates since 2007, participants in the market continue to suspect that the conditions are ripe for another surplus in material stockpiles.

For many traders, the time has come to begin hoarding their supply of aluminum in warehouses while waiting out this decline in prices. The goal for them being to patiently observe the shift in market prices until they can find an ideal moment to re-enter the markets with their supply and profit off of the eventual rise in demand. Currently, expectations are high that the current trend will culminate sometime within the next several months.

What This Means

For many who have been carefully observing market trends, the belief is that once the demand for aluminum reaches its lowest point, which may involve a complete reversal of demand for a period of up to a year, another shift will occur that will skyrocket prices.

By waiting and watching, traders across the globe are choosing to stockpile aluminum for future sale based on the hope that the current decline in demand will not last long enough to harm any potential profits they will make once the market shifts upward again in the coming months.

What this means, in the long run, is that although apparent supplies of aluminum at the manufacturer level may seem to be declining, the reality is that much of the raw material being produced is, in fact, being held upstream while stockholders and traders wait patiently for a chance to boost their overall profits. 

The challenge, however, is whether or not the overall demand for aluminum across the world will continue to decline, or if the shift back towards higher profits will happen as quickly as these traders expect. As production of raw material continues, and space in warehouses continues to shrink, questions have begun to swirl about exactly how long the current market trends will continue, and whether or not these short-term changes are a signal of a much larger concern in the coming year.

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