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Summary:

Alcoa, the world’s largest aluminum company, this week slashed its growth forecast and suspended its stock repurchasing program, battening down the hatches as the global credit crunch continues to hurt demand. My feeling is that aluminum is the canary in the coal mine and is foretelling tough times ahead for both the consumer electronics and computer hardware sectors.

Many of us who live in Silicon Valley pay no heed to decidedly unsexy materials such as aluminum. Of course, they’ve long been integral to our economy — just look at the world’s largest aluminum company, Alcoa. It turned 120 years old on Oct. 1.

A week later, however, the Pittsburgh-based company slashed its growth forecast and suspended its stock repurchasing program, battening down the hatches as the global credit crunch continues to hurt demand. As CEO Klaus Kleinfeld said:

Given the sharp decline in metal prices and increasingly soft demand in our key markets, we are stopping all non-critical capital projects, making targeted reductions to match market conditions, and are adjusting our manufacturing capacity to meet demand in rapidly changing upstream and downstream markets. We are halting production at our smelter in Rockdale, Texas, adjusting alumina capacity accordingly, and are continually reviewing under-performing assets throughout our portfolio. And, we are suspending our share buy-back program.

Why does this matter to Silicon Valley? After all, aluminum is used to make things like airplanes and cars. True, but that’s not all. As a quick visit to Alcoa’s web site will reveal, aluminum is also used to make displays, mobile phones, notebook computers and whole slew of tech-related things. Alcoa even sets up a booth at the annual Consumer Electronics Show.

And now the company says demand in North America is going to decline 10 percent this year. Meanwhile, it expects growth in China to only rise 15 percent compared with an earlier forecast for a 22-percent rise.

And guess where major electronics items are made? China, after which they are sold in North America. My feeling is that aluminum is the canary in the coal mine and is foretelling tough times ahead for both the consumer electronics and computer hardware sectors. We’re already seeing a slowdown in the sales of LCDs TVs — the makers of which are big buyers of aluminum.

There is a good chance the tech malaise is going to spread to the likes of Apple, which uses a ton of aluminum to make their products. Aluminum is also a key ingredient in mobile phones, another area where demand for devices is going to slump, especially for the more profitable, high-end devices. Keep an eye on Nokia and listen for its forecasts.

The automobile industry – a major consumer of aluminum – is already in a deep abyss, with monthly sales plummeting. Automakers are big consumers of technology and have put a whole lot of electronics (including chips) — $113 billion in 2008 — from companies that include chip makers like Freescale, Infineon and STMicroelectronics into cars to power everything from the GPS to the powertrain.

Any slowdown there is going to eventually move up the food chain and hurt these chipmakers. Strategy Analytics recently forecast a $1.1 billion decline in sales of automotive chips for engines in the U.S. alone.

Whichever way you look at it, the credit crunch is going to crimp consumer demand, which will in turn lead to a clampdown on ad spending, including on the web.

And you thought aluminum was boring!

  1. My family is in the automotive retail and motor sports leasing business, while I have been a small ‘s’ product strategy analyst (think product manager under a closed-end contract) for 15 years. I knew that we were in big trouble in the CE sector when core mfr metals (copper, palladium, gold, platinum, and aluminum) started to boom and bust.

    That boom was a flight from the equities market, and into commodities. This will be Americas new episode of the ‘Grapes of Wrath), i.e. a new era dust bowl that will inundate Silicon Valley, and what is left of America’s specialist manufacturing capacity.

    Too many social bookmarking apps, too many geo-location apps to perform the mission critical task of telling you (wait for it now) where your friends are at the bar. 5 million here, 7 million here for another social network for doggies and their childless Moms.

    Much of the VC cake going to ‘Silicon Valley Undertakers’, who have serially taken 5 or 7 rounds, never making a cent, sometimes making exits that created no net value for the American economy.

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  2. It’s a good night, speaking as a Jew, to fast for 24 hours. Good practice for what is about to hit SOMA and Palo Alto with a vengeance.

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  3. I agree.

    Rising commodities prices (gold just spiked to $900 an ounce) and decreasing demand (oil has fallen to $86 a barrel) mean a slowdown unlike anything we’ve seen in a long time.

    Back in July, I wrote:
    “It is my uninformed opinion that we are about to plumb into the depths of an economic depression the likes of which may rival the Great Depression.”

    I wish to hell I was wrong. But the credit crunch is destroying entire supply chains as well as low-margin industries (ask any restaurateur) and the Bay Area is not immune from the financial contagion. Aluminum is the first of many blocks in a Periodic Table that will be checkered in deficit red this time next year.

    The Silicon Valley optimist in me hopes I’m mistaken. But now, after reading your analysis, Om, the pessimist in me is rising.

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  4. Is this what Stewart Butterfield was foreseeing when he left Yahoo ;>

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  5. By 2050 or so, the world population is expected to reach nine billion, essentially adding two Chinas to the number of people alive today. Those billions will be seeking food, water and other resources on a planet. And to think, that people’s ability to manage themselves and their resources on the planet today is now highly in ??

    ——-

    I know that people (let’s just use the U.S. for this example) think they need a new car every few years, like they need a new iPod every 6 months.

    Let’s get real Americans, you don’t need any new cars at all now. There are enough good USED cars for people to SHARE for god knows how many years to come.

    Maybe this will help that reality become a little more clear for them http://www.bloomberg.com/apps/news?pid=20601087&sid=aUMsMdzmXd_o&refer=home

    Sure, a hell of a lot of people are gonna be out of work cause of this. The U.S. needs to start putting these people to work on things that matter. Buying new cars, does not matter really now or probably for a long time.

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  6. [...] Om Malik, Monday, October 13, 2008 at 1:39 PM PT Comments (0) I was on Yahoo’s TechTicker earlier today talking about all things tech, including some of our recent posts, like the one about how aluminum is a canary in the tech mine. [...]

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  7. [...] mass layoff events: September and October 2008, and September, October and November 2001. Or maybe, as Om suggested earlier this year, it’s a good idea to watch commodity prices. For agricultural commodities, those with an eye [...]

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