Aluminum: Canary in the Tech Mine

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!