China's Pain is Century Aluminum's Gain

U.S. aluminum producer Century Aluminum (nasdaq: CENX - news - people ) got a boost when reports surfaced that Aluminum Corp. of China (nyse: ACH - news - people ), better known as Chalco, stopped production at two of its aluminum production plants in the Guizhou province because of power outages. The Guizhou province has suffered from power shortages since Dec. 2007, the company said, because of severe weather, which tightened the supply of coal and power.

Chalco, the largest producer of aluminum in China, said production stopped as of Jan. 23.

Century Aluminum¡¯s shares soared 3.5%, or $1.56, to $45.95 in afternoon trading.

Amir Arif, the senior vice president for energy and natural resources at Friedman Billings Ramsey, said that global aluminum inventories have been tracking higher over time because of strong supply growth out of China compared to other metals, which has pushed down aluminum prices.

China, Arif said, produces 31% of the world¡¯s aluminum supply, while the U.S. produces 7%.

When China¡¯s aluminum production tapers off, prices for aluminum increase, benefiting other aluminum producers. Alcoa (nyse: AA - news - people ), which also produces aluminum, got a boost as well, but since it is a much larger integrated company with both upstream and downstream revenue, the impact was smaller. Century Aluminum is much more leveraged to the price of aluminum, Arif said.

Alcoa¡¯s shares inched upwards 0.2%, or 5 cents, to $30.86. Kaiser Aluminum shares slid 1.6%, or $1.01, to $61.80, while Empire Resources shares jumped 3.7%, or 14 cents, to $3.96.

Arif said that while the outages at Chalco¡¯s plants are only temporary, there will start to be more power issues in China going forward. China has been subsidizing power for its users so demand for power has grown unabated, Arif said. As the costs to produce power, whether coal or other fuel, has increased, the Chinese government has spoken about increasing the power costs for institutional consumers like aluminum consumers. ¡°That¡¯s why you¡¯ll start seeing a lot more of these types of power issues develop,¡± he said.

Longer term, Arif said, the demand for aluminum looks very strong. Although the downturn in the U.S. economy has started to cut into the demand, Chinese demand numbers and the demand from other emerging markets are very strong. (See " Alcoa: Aluminum Sliding")

Aluminum demand is linked to manufacturing and housing demand. The Institute for Supply Management recently reported that its index of U.S. manufacturing activity contracted in December following 10 consecutive months of expansion. (See " Manufacturing Slowdown Slams Wall Street") The same day the Commerce Department released U.S. construction spending data during November inched up 0.1%, up from a revised 0.4% decline in October, as educational and highway construction helped offset the continuing decline in residential construction.

Meanwhile, Century Aluminum announced that Craig Davis has resigned as its chairman and a director of the company.

The aluminum producer said its board elected John O'Brien, a current director, to succeed Davis as chairman.

O'Brien is the managing director of Inglewood Associates, a professional services and investment firm. He has served as a member of Centurysince 2000, most recently as chairman of the audit committee.

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