What happened
Shares of aluminum giant Alcoa (AA 0.06%) took several weeks to rise by double digits but barely five days to give up most of those gains. I'm referring to Alcoa stock's fall this week -- it was down about 11% for the week as of 10 a.m. ET Friday, according to data provided by S&P Global Market Intelligence, despite opening the last day on a positive note.
So what
Earlier in the week, Alcoa announced it'll curtail production capacity by one-third at its Lista smelter in Norway in the wake of rising energy costs. Elaborating on the event, Alcoa said that while almost 95% of its global smelters source energy under long-term contracts or fixed and self-generating pricing, the remaining -- which primarily constitutes Lista -- rely on spot energy prices. With energy costs rising significantly of late, Alcoa has shut part of Lista for two weeks.
With costs rising, companies like Alcoa require high commodity prices to grow their bottom lines. Unfortunately, prices of aluminum are crashing hard.
As of this writing, aluminum prices have plunged almost 40% from their record peak in March, tumbling to 16-month lows this week after the latest economic data from China spooked the industry.
China's economy is faltering. Factory activity contracted for the first time in three months in August, even as rising coronavirus cases have forced the nation to impose further lockdown restrictions. Meanwhile, a severe drought has crippled manufacturing activity in key industrial regions, and the country is already facing a property crisis.
Since China is the world's largest consumer of aluminum, a slowdown in the economy has sparked fears about weak demand for the metal, since it's widely used in industries like transportation, which typically bears the brunt of a slowdown. A looming recession in the U.S. and an energy crisis in Europe have further fueled these fears.
Now what
Smelters across regions like Europe and China are suspending operations because of sky-high energy prices. That should hit global supply and help prop up aluminum prices. However, the supply disruptions have failed to quell fears of a global slowdown and a slump in the demand for aluminum. That has driven aluminum prices and aluminum stocks lower. Alcoa is now down almost 16.5% year to date.
However, investors in Alcoa shouldn't panic. After ending 2021 with record profits, Alcoa's net profit more than doubled in the six months ending June 30 this year. The company has become financially stronger in recent quarters, generates strong cash flows, pays a regular dividend, and recently boosted its share repurchase program. Alcoa also has the scale and size to flex production as the end markets warrant, so it should be able to navigate a volatile business environment.
