Profit from the Rebound in These 4 Global Commodity Names

03/07/2013 9:45 am EST


George Putnam

Editor, The Turnaround Letter

A number of factors show well for certain metals that have been depressed, and George Putnam III of The Turnaround Letter sees new opportunities in related stocks.

In 2012, most asset classes (such as stocks and bonds) performed well, but a noticeable laggard was commodities and commodity-related investments.

Among other things, that asset class was hurt by concerns about the downturn in the European economies and a possible slowdown in China. As a result, the steel and aluminum stocks were among the worst performers in the global stock markets.

This grabbed our attention for two reasons, one technical and the other fundamental. On the technical side, investor views can change rapidly, and we’ve often seen one year’s losers become the next year’s winners.

On the fundamental side, there are several economic factors that could work to the benefit of the metals producers:

  • Over the last decade or so, there has been steady consolidation in the sector. Large producers have gobbled up smaller producers around the globe, thereby reducing competition.
  • Low energy prices in North America will help the US metals companies.
  • There are signs of a nascent rebound in construction in the US—homebuilding is already on the mend, and commercial construction usually follows.
  • There are also signs that the slowdown in China may not be as great as many investors feared.

Put all these things together, and it makes the steel and aluminum stocks look like very attractive turnaround plays. The stocks discussed below are all large, global producers that would benefit greatly from a rebound in the sector.

Aluminum Corp. of China (ACH) is China’s largest producer of alumina (the raw material for aluminum), as well as its largest aluminum fabricator.

As the Chinese market struggles with potential overcapacity, Chinalco is seeking to manage costs, as well as expand into other related markets, such as copper, coal, iron ore, and rare earth metals. While there is evidence of overbuilding in areas of China, the stock has strong rebound potential if economic growth picks up again there.

ArcelorMittal (MT) is based in Luxembourg, but it has a presence in more than 60 countries. The company claims to be the world’s leading steel and mining company, with leadership positions in the automotive, appliance, packaging and construction markets.

Considerable exposure to Europe has crimped operating results. But management is being aggressive in rationalizing operations, cutting the dividend and firming up the balance sheet with new issues of stock and subordinated notes.

Gerdau (GGB) is a Brazil-based steel manufacturing company. It has a strong presence in South America, but also operates in the US, Canada, Spain, and India.

Gerdau has faced all of the problems that the industry has endured in recent years, but its home-field advantage in Brazil and South America position it well for future growth. Among other sources of regional stimulation will be the 2014 World Cup and the 2016 Summer Olympics.

Posco (PKX) is the largest steel producer in South Korea and one of the largest in the world. The bulk of sales are to the Korean market, with China and Japan also being significant.

The company’s exposure to autos and shipbuilding hurt during the latest recession, but it remains competitive and solidly financed. It recently joined a consortium to buy a mine responsible for 40% of Canada’s iron ore production. With its strong Asian presence, Posco appears cheaply valued.

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