Commodities are on a huge upswing as this global economy recovers. I’ve written about copper, coal, and uranium companies to assess the winners and losers in those industries. This week, we look at Aluminum. Consumption from Emerging Markets is playing a heavy part of the surge in demand. Many believe Aluminum prices have a pop coming since the metal hasn’t rallied in any noticeable way with other commodities. If China, which has regularly processed its own aluminum, has to dip its chopsticks into the global pot for more resources, we can expect prices to shoot up, much to the delight of those of us invested in metal miners.
Remember, not all Aluminum producers have the same movement with the price of the commodity. We can spend hours toiling over the fundamentals of a potential investment, but a quick comparison to the macroeconomic trend shows which company will travel with the trend in Aluminum prices, and which can withstand shocks to the market. I’m still naïve sometimes. I too just assume that Alcoa (AA) would be the top performer in the industry. After all, it competes directly against other global mining giants and operates all over the world. But looking at the big picture, I get another vantage point on Alcoa:
Alcoa bottomed out in early 2009 and has had a difficult time rallying. But Alcoa’s not alone: many large-scale aluminum manufacturers are having a difficult time following the spot price, much less beating it. CHALCO (ACH), Century Aluminum (CENX), and Noranda Aluminum (NOR), smaller companies in terms of Market Cap, are trending upward and best Alcoa over the long term.
The best performers vis a vis Aluminum are actually not aluminum companies, but rather, companies that manufacture various other metals. BHP Billiton (BHP) correlates beautifully to the spot price of aluminum but has managed to beat the aluminum spot price since early 2009. Other commodities are also highly correlated to BHP, making it highly attractive to those of us in the commodities market.
Moral of the story – Not all companies within an industry are a good play on the sector – especially for commodities. Even more importantly, the best way to go long within an industry is to sometimes look outside of that industry. Macroeconomic indicators allow you to do just that by comparing the correlations across industries to pick winners.