Aluminum: Better Days Ahead

Aluminum has been a serial underperformer as the entire metals sector rallied over the last several months. But the fundamentals are looking better, according to BMO Capital Markets.

Economist Bart Melek wrote that demand prospects for the metal are improving, and should continue to be positive through the rest of 2009 and 2010 as China continues to "spend on everything" and Western countries emerge from recession.

Aluminum should also get a boost after an industrial accident in Rusal's operations in Siberia, which could remove about 500,000 tonnes of supply from the market, Mr. Melek wrote. The unavailability of inventories from the London Metals Exchange for prompt delivery is another factor that should be good for prices.

Mr. Melek raised his target price for the second half of 2009 to US80¢ a pound, up from US75¢. He also increased his 2010 target 12.5% to US90¢ a pound, while leaving his long-term target unchanged at US$1.15 a pound, which he called "a level necessary to sustain the industry."

Aluminum companies have suffered mightily during the downturn, as prices fell so far that more than 80% of the industry was probably losing money at the bottom of the cycle. But higher prices mean that it could be a good time to look at the equities again.

BMO analysts David Radclyffe and Tony Robson offered up two names for investors willing to take the plunge: Alumina Ltd. (AWC) and Rio Tinto Ltd. (RTP). Alumina is favoured for its high-quality assets, solid balance sheet and strong upside in Brazil. Rio, meanwhile, has sorted out its debt problems from the Alcan acquisition and has the most leverage to aluminum among the large-cap, diversified miners.