The Bullish Case For Aluminum Stocks

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 |  Includes: AA, ACH, AWCMF, CENX, KALU, RIO
by: Sammy Pollack

The price of aluminum has been under pressure for a myriad of reasons. Here are the most important.

  • Weaker global economy due primarily to Europe and China
  • Oversupply of aluminum resulting from overproduction
  • Stronger U.S. dollar

The chart below shows the price of Aluminum over the past year.


Source: metalprices.com

The leading producers of Aluminum have tracked the price very closely.

Alcoa (NYSE:AA) 1-year chart

Source: CNBC

Rio Tinto (NYSE:RIO) 1-year chart

Source: CNBC

Century Aluminum (NASDAQ:CENX) 1-year chart


Source: CNBC

Other ALuminum producers with similar charts are Aluminum Corp of China (NYSE:ACH), Alumina Ltd (AWC), and Kaiser Aluminum (NASDAQ:KALU).

While headwinds remain, there are reasons to believe that Aluminum prices may have turned a corner.

Europe

The European situation appears to be stabilizing. Proof of this is the recent rally in the European stock indices. Over the past 3 months, Germany's DAX index is up over 16%. While Europe may be entering a recession, equity markets are beginning to believe the downturn will be short lived.

DAX 3-month chart


Source: CNBC

China

The Chinese economy is seen as improving, as government actions have broken the back of inflation while not killing growth. The Shanghai Composite is up over 6% year-to-date.


Source: CNBC

Production Cuts

  • Alcoa recently announced plans to cut production capacity by 12%.
  • Rio Tinto (RIO) recently announced that it has already reduced production by 12% and may consider shutting U.S. Aluminum unit.
  • United Co. Rusal says that it might cut production by 6% over the next 18 months.

The combined effect of these production cuts will make the Aluminum market tighter and could lead to much higher prices.

Dollar Giving Up Gains

So far in 2012, the U.S. dollar has started to give up some of its gains from late 2011. A weaker dollar is bullish for aluminum prices, because aluminum is priced in dollars.

U.S. Dollar Index year-to-date chart


Source: CNBC

Good Value Relative to Copper

  • Copper has doubled since 2005; aluminum has remained about the same.
  • Eric Danemar, a Moscow-based analyst with Deutsche Bank AG told Bloomberg, "Aluminum prices are less than 5 percent higher than average production costs of about $2,100 a ton, while copper, which is in more limited in supply, trades at twice the $4,200 cost of producing each ton."

Conclusion

The Aluminum price has upside as many of the key factors that have been driving weak performance are beginning to abate. Any rally in the price of Aluminum will drive the stocks of leading producers higher because the correlation is very strong.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.