Even if China Steps in, Alcoa Stock Is Almost Pointless

No fiscal measure can overcome severe demand loss

By now, most publicly traded companies have suffered at least sizable losses due to the novel coronavirus pandemic. However, few companies have been devastated like Alcoa (NYSE:AA). An aluminum and industrial metals specialist, the company gleamed during past economic paradigms. But as societies shifted their priorities toward digital innovations, Alcoa stock lost its luster.

alcola stock
Source: Daniel J. Macy / Shutterstock.com

Therefore, the devastation couldn’t have come at a worse time. Prior to the pandemic, both the impact and the longer-term implications of a drawn-out trade war between the U.S. and China significantly hurt demand for Alcoa stock. That said, encouraging reports that relations between the two were improving helped AA gain back lost ground.

Today? Alcoa stock has lost more than two-thirds of its market value compared to the beginning of this year. And that’s despite a strong 7.3% swing higher on the April 7 session, a time when the rest of the markets traded wildly.

If you’re thinking about taking a crack at AA, I’d think again. At this point, the only thing that can save Alcoa stock and the struggling industrial metals sector is major stimulus from China.

Of course, that could happen given the circumstances. Even so, AA shares face three other risk factors, which I’ll go over below.

Tepid Chinese Economy Doesn’t Support Alcoa Stock

Earlier this week, Wall Street enjoyed a positive start thanks to encouraging coronavirus infection trends in New York, now the world’s epicenter for Covid-19. However, New York Governor Andrew Cuomo was adamant about keeping the course regarding his statewide shelter-in-place order. Otherwise, he reasons, the good work that the fine folks of New York delivered could be wasted.

Logically, the same sentiment applies to China and the country’s economic restart initiatives. According to a report from Nature.com, scientists worry that a second coronavirus wave could spark as China eases its lockdowns.

New China Covid-19 Cases
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Source: Chart by Matt McCall Research Team

This is a very reasonable concern. If you look at China’s infection trend past the 81,000 level, you’ll notice that cases have quickly escalated. When you juxtapose this data to other international cases at the onset of multiple infections, you’ll realize that the Chinese leadership must tread carefully. Otherwise, they risk starting another crisis.

Furthermore, scientists warn that a significant portion of China’s population have not been infected and therefore, have no immunity toward Covid-19. Thus, the government has every incentive to take their economic recovery efforts slowly. Naturally, this doesn’t necessarily help Alcoa stock, which needs a huge lift now.

AA Faces an Automotive Disaster

Undoubtedly, the biggest single impact to Alcoa stock is the cratering of the automotive sector. According to an industry survey conducted by Norsk Hydro, the transport industry accounted for the most allocation of global demand for aluminum products in 2018.

Following that are construction at 25% and machinery and equipment at 11%. Taking a hit to this vital market is exactly what Alcoa stock doesn’t need.

In fact, the automotive disaster is a double whammy. Prior to the pandemic, both millennials and Generation Z have not placed as much emphasis on car ownership as older generations. We could spend hours discussing the myriad reasons why this is. But for our purposes, it’s safe to say that lack of demand has caused total vehicle sales to flatten in the second half of last decade.

But with the coronavirus, the consumer vehicle market has utterly collapsed. Even if China restores the automotive parts supply chain, it’s somewhat pointless at this juncture. After all, it’s not cars but food, water, and toilet paper that occupy global consumers’ mindset.

Obviously, this is an unimaginable headwind for Alcoa stock.

Construction Is a No Go

As you know, the U.S. and major developed nations have placed less emphasis on building stuff and more emphasis on technological innovations. Therefore, most of our manufacturing base has been exported, which is starting to bite us in the rear.

Given the troubles we’ve experienced in this regard, should stakeholders of Alcoa stock expect a reversal in global manufacturing and construction trends? I wouldn’t bank on it.

One of the consequences of the pandemic is the present oil price war. This doesn’t just hurt oil-exporting nations and individual energy companies. It also has a ripple effect on renewable energy products.

While we’re not building as much stuff as before, when we do build, we focus on renewable energy platforms, such as wind turbines. But with traditional energy costs so low, the economics for renewables look less attractive. Likely, this will crimp construction projects related to this sector, which does no favors for Alcoa stock.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/even-if-china-steps-in-alcoa-stock-is-almost-pointless/.

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