• Aluminum prices near six-year low and premiums have collapsed
  • Chinese producers are churning out record amounts of the metal

Alcoa Inc.’s decision to split apart the strong and weak parts of its business shows how ugly the aluminum market has become.

The company will separate its higher-margin manufacturing operations from a smelting and refining business that’s under pressure from plunging commodity prices and competition from record Chinese exports. Alcoa, which takes an ore called bauxite and processes it into aluminum, has lost almost half its value since last November as prices for the metal tumbled to a six-year low.

“The commodity side of the portfolio does continue to face some fairly significant headwinds, and headwinds that don’t necessarily have a clear near-term or even long-term outcome,” Josh Sullivan, an analyst at Sterne Agee CRT in New York, said by phone. "It’s a very challenged world.”

Aluminum prices trading near the lowest since 2009
Aluminum prices trading near the lowest since 2009
LME

To make matters worse, aluminum premiums have collapsed, further hurting the company’s profits. The premium is a surcharge added to market prices set on the London Metal Exchange to reflect the cost of getting raw materials and it tends to rise and fall with supply and demand. In the U.S., the premium plunged 70 percent this year, according to Metal Bulletin data.

Behind the decline in aluminum is China, which is churning out record amounts of the metal and makes up half of the world’s production. The country’s slowest expansion in more than two decades is also curbing demand for the metal used in everything from packaging to laptop cases.

Rising exports from China are making it harder for other companies to compete. About half of all production is losing money at current prices, the most since the global financial crisis of 2008, according to Macquarie Group Ltd. The aluminum market will see a 10th year of oversupply next year, according to Societe Generale SA.

To protect their businesses against falling metal prices, companies including Alcoa and Norsk Hydro ASA have expanded processed-aluminum operations that have bigger profit margins.

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