Alcoa vs. Aluminum

For your reading pleasure, I am submitting a brief analysis of Alcoa's stock price -- as listed on the NY Stock Exchange (NYSE) -- and the London Mercantile Exchange's price for aluminum.

Before I do, I wanted to let whomever may be reading that I have updated my blog a bit with links to other blogs and sites that I frequent, as well as a link to my GitHub account.

... and, my GitHub account now has a repository for the blog that contains my R scripts and data. The README.md file explains the pertinent details.

As for my blog post, all of my data comes from Quandl.  If you haven't done so, you can sign up for an account for free. This will give you easier access to their data.

I decided to go with a year-to-date approach for my analysis.  Alcoa's stock price hasn't been all that great this year, as you can see here:

... it's lost roughly one-third of its value over the course of the year.  So, I looked up the settlement prices (the "cash" or spot price) of aluminum on the LME:

Visually, there is a noticeable correlation.  After controlling the two datasets for commonly shared dates -- U.S. markets and UK markets have some operating differences -- I was able to transform the data to make them comparable.  The correlation between the datasets is roughly 85%.

At first this may appear natural, but the relationship would make more sense if it were the opposite.  One would expect the Alcoa share price to go up as the price of aluminum goes down, since their costs would go down.  To see if the law of supply and demand were working with that assumption, I then downloaded the stock quantities of aluminum that LME has warehoused around the world.

There is a noticeable decrease in quantities of aluminum (both "primary", or pure, and alloy) being warehoused.  These quantities are closing quantities, defined as the on-hand quantity at the close of business day after deliveries in and out of inventory.  Closing quantities includes open interest quantities and cancelled interest quantities.

The next question that comes to mind is: How is this important?

Simply answered with: It may be a sign that demand for aluminum may be falling... and that may be a sign of weakness in the manufacturing sector.  Aluminum is a pretty common metal and is widely used in manufacturing, so decreasing quantities and prices may be the result of decreased demand.  

To see if this hypothesis is indeed true, I will have to do further research focusing on ore production as well as other companies with operations similar to Alcoa.