CRU: What Blunts the Bull Market in Aluminum?

The last time the U.S. experienced high, persistent inflation was in the 1980s. Interest rates were 14%, prices went up relentlessly and if you did not buy it today, tomorrow it would be more expensive and maybe not even available. In 2021, we are seeing signs of inflation across diverse products such as chlorine, chicken, lumber, semiconductor chips and, of course, aluminum.

What Breaks the Inflationary Cycle in Aluminum and Other Key Commodities?

The inflation we are seeing now is a two-edged sword from COVID-19. It started with strong  demand and ran headlong into supply-side constraints. One of the products of the pandemic has been that people are homebound. People are not spending money on “experiences” such as dining out, sporting events, theater or travel. Spending has been heavily concentrated on durable goods to build “sanctuaries” to insulate people against COVID-19. This has translated into new home construction outside densely populated urban areas, improvements to existing homes, second homes as vacation getaways, plus purchases of recreational vehicles and boats. Many of which are metal-intensive.

Stimulus checks contributed to this spending allocation, and the stock market has given many Americans a feeling of greater wealth. People have seen their 401K and other investments surge in 2020 and 2021, encouraging them to spend on big ticket items. Housing prices are booming, so people can pull equity out of their homes to support this spending spree.

This demand for durable goods has strained supply chains. Labor shortages have sapped industrial capacity. A common theme is “many workers would rather stay home and stay safe, collecting the unemployment benefits.” This has compelled 14 states to opt out of federal unemployment benefits in early June.

Even if labor were available, land and seaborn freight costs have exploded—up 3-4 times over 2019 levels.

What’s Likely to Change? Consumer Spending Patterns

We have probably seen the end of stimulus checks as the Biden administration shifts gears to infrastructure spending.

The COVID-19 situation is improving. Vaccinations are widespread and local governments are being creative to encourage the reluctant to get vaccinated. A return to normality is coming, perhaps sometime in late third quarter or fourth quarter. There are plenty of tangible signs that we are returning to some sense of normal living AND spending patterns:

• Broadway theatres will reopen Sept. 14 to capacity audiences, and ticket sales are brisk.

• American Airlines is bringing back its entire mothballed fleet as summer travel demand is booming.

• Sports venues are allowing more fans in (Super Bowl tickets for LA are already selling quickly at initial prices about 20% above this year).

These are perfect examples of “experience” consumer spending in recovery. That also means we may be seeing the peak in consumer spending on durable goods. Yes, there is a big backlog of orders. That probably can support prices into the fourth quarter. But new orders may start in the third quarter and that could take the edge off prices. We believe this is the case in aluminum. Prices could dip. However, we do believe that 2022 is setting up for strong economic growth, and prices should resume a slow but steady climb through the year. Get used to inflation, this is not a temporary flash-in-the-pan event that leaves us behind when COVID-19 fades in the rearview mirror.   

Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at gregory.wittbecker@crugroup.com

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