Aluminum Is a Good Commodities Play

03/20/2008 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad and Yiannis G. Mostrous, editors of Vital Resource Investor, say the commodities bull market will continue and they like an aluminum company’s shares.

There’s no doubt about it: vital resources are in a bull market of gigantic proportions. And that means plenty of money will be made along the way.

Unfortunately, no market moves in a straight line. And when you’re talking about commodities, the action is often extremely violent. The upshot is getting the most out of this bull run will require patience. It also means being willing to take some money off the table when the environment gets a little too exuberant and, therefore, prone to a near-term setback.

Much of commodities’ rise in 2008 has been the result of a corresponding crash in the US dollar. Some estimates attribute recent gains of as much as 20% in commodity prices due solely to the greenback’s demise. These gains would quickly reverse, should the buck even temporarily catch its breath.

The other reason we’re becoming a bit more cautious in the near term is that a growing number of commodity bears and US dollar bulls seem to be throwing in the towel. CalPERS (California Public Employees’ Retirement System), for example, announced an increase [recently] to its commodity allocation to $7 billion. They have a reputation of coming late to every bull market.

The real story behind commodities is rising demand as the developing world’s needs grow, coupled with increasingly stretched supplies as new reserves get more difficult to exploit and host governments demand fatter profits.

As we’ve pointed here, the US is gradually losing its status as the world’s commodity price setter. Now it’s China—which now consumes more than twice as much copper as the US—that’s assuming the role.

Moreover, the world is increasingly running up against some very real supply issues. The transportation infrastructure issues in Australia that drove up coal prices this month are only the tip of the iceberg. And as roads and railroads are strained, they become increasingly more vulnerable to natural disasters.

We favor aluminum in the industrial metals sector. We’ve been advocating aluminum for some time, and the market’s finally going our way.

Aluminum prices have been impacted by lack of available power in China and South Africa and higher alumina and bauxite prices. It’s also an undersupplied metal and, therefore, we expect prices to stay higher for longer. Supply is also stretched, especially in a historical context as emerging market demand resets the metal’s base price. Asia and Europe consume 67% of total production.   

Australia-based Alumina Ltd (NYSE: AWC) is the best-leveraged play to the aluminum story. The company owns 40% of Alcoa World Alumina and Chemicals, which, in turn, holds the world’s largest, low-cost portfolio of quality bauxite and alumina assets. Buy Alumina Ltd. (The ADSs closed Wednesday under $19—Editor.)

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