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Alcoa Inc (AA), United States Steel Corporation (X), Cliffs Natural Resources Inc (CLF): ECON101 At Its Finest

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Alcoa Inc (NYSE:AA)Supply. Demand.

Any basic economics class will start with these two words on the blackboard. They are the yin and yang of the market. Whenever one of these two items falls out of balance, it can take a major toll on companies that do business in that space. In recent years, certain sectors have been ravaged by an imbalance in supply and demand. Let’s look at these sectors and see what will be needed to get back.

Metals: I sense a great disturbance in the (supply) force
Predicting global demand for metals can almost be answered with one question: How much will China and India need? Demand outside these countries is much more steady and predictable, but the growth in China and India has the ability to swing global supplies more so than anywhere else in the world.

Back in 2011, aluminum prices hit their post financial-collapse peak, and there was a mad dash to increase supply to keep pace with Chinese demand. Since then, Chinese demand has waned and stockpiles for both aluminum and iron ore have grown, while spot prices for both materials dropped by at least 23%.

Iron Ore Spot Price (Any Origin) Chart

Iron Ore Spot Price (Any Origin) data by YCharts

Of course, when a company deals exclusively with these kinds of materials, a major slump in demand and prices will deal a major blow to share prices. Alcoa Inc (NYSE:AA)United States Steel Corporation (NYSE:X), and Cliffs Natural Resources Inc (NYSE:CLF), all of which deal exclusively with either aluminum- or steel-related materials, have seen their share prices drop since the metal-price peak back in 2011.

AA Chart

AA data by YCharts

Today, aluminum, iron ore, and metalurgical coal companies have started to slow down production to let demand catch up with excess stockpiles of these materials. Alcoa Inc (NYSE:AA) has idled almost 500,000 tons of aluminum smelting capacity, and Cliffs Natural Resources Inc (NYSE:CLF) shut down two of its facilities in Michigan and Minnesota late last year. Both of these moves are part of a larger concentrated effort by several metal companies to bring prices back up.

In a way, these moves are starting to pay off. Alcoa Inc (NYSE:AA) recently reported better-than-expected earnings this past quarter, and although United States Steel Corporation (NYSE:X) still saw a sizable loss this past quarter, it was just 33% of the loss the company suffered on a year-over-year basis for the period. The outlook for the rest of 2013 and into 2014 looks much stronger, as stockpiles for these basic metals are rather low, Chinese demand is growing again, and prices for these materials are starting to inch their way back up.

Solar panels
Commodities such as metals and other basic materials have always made for a rather cyclical industry, always reacting to the recent moves in demand. It’s less rare for a manufactured product such as solar panels to experience an oversupply as it has recently, but moves by certain companies have brought on that very problem.

Like the metals market, the market for solar panels has been dominated by China, but in a completely different way. Rather than being the largest demand source, it’s been the largest supply source of cheap solar panels around the world. Over the past several years, the Chinese government heavily subsidized major solar-panel manufacturers such as Trina Solar, Yingli Green Energy, and the recently bankrupt Suntech Power Holdings. China was thus able to capture 80% of the worlds solar panel market by being a low-cost provider.

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