The Rising Appeal of Aluminum Firms

Aluminum producers, the laggards of the mining boom, may rise as China reduces sales onto the world market and buys more of the metal from overseas.

Chinese net aluminum exports have fallen this year as the government cut tax incentives for overseas sales and curbed smelter expansion to save energy and ease pollution. The nation, the largest consumer of aluminum in the world, may become a net importer of the metal next year for the first time since 2001, according to UBS.

Average prices on the London Metal Exchange will rise 30 percent by 2009, Sanford Bernstein said Oct. 19. Morgan Stanley and UBS also forecast higher prices.

That will raise the shares of the biggest producers: Alcoa, Rio Tinto and Norsk Hydro ASA, UBS said. The top five, also including Aluminum of China, or Chalco, and United Rusal, account for 38 percent of global output, according to HSBC.

"The outlook for the aluminum industry is favorable because of worldwide demand," led by China, said Peter Klein, a portfolio manager at Fifth Third Asset Management.

"Companies like Alcoa stand to benefit from that and M&A activity in the sector as resource companies look to diversify. That story isn't finished yet," Klein said.

He said he is considering buying more shares of Alcoa.

Rio, the third-largest mining company in the world, paid $38.1 billion this year for Alcan, beating Alcoa to become the top aluminum producer. Rio is forecasting global demand to gain more than 6 percent annually to 2011.

Since then, BHP Billiton, the biggest mining company worldwide, has made a stock offer for Rio in what would be the largest takeover in the world. Rusal, the second-largest aluminum producer, was created this year through the merger of OAO Russian Aluminium, OAO Sual and the alumina unit of Glencore International.

"We're seeing a consolidation theme sweep through the aluminum sector and that's going to be good for pricing," said Adam Dixon, who helps manage about $11.6 billion at Ausbil Dexia in Sydney, including Rio stock. "Rio Tinto has potentially put its foot on the lowest cost production globally."

Alcoa has gained 21 percent this year and is trading at 13 times estimated earnings. Hydro, the second-largest aluminum producer in Europe, is trading at 10 times earnings and has jumped 20 percent this year. The Bloomberg World Mining index is trading at 18 times earnings and has risen 72 percent.

Aluminum for immediate delivery closed at 2,502.1 Australian dollars, or $2,205, a ton on Friday. It will average $3,266 a ton in 2009 according to Sanford Bernstein's Andrew Keen. The metal may reach a record $4,000 a metric ton as early as next year, Alexander Bulygin, the chief executive officer of Rusal, said in March.

Expanding supplies may prove him wrong. Global inventories of aluminum on the LME have jumped 50 percent in the past two years. Aluminum cash prices may average 13 percent lower next year as rising inventories put pressure on prices, JPMorgan Securities forecast last month.

"Aluminum stocks on the LME are very high," said Troy Angus, a portfolio manager at Paradice Investment Management in Sydney. "An expectation that the Chinese will stop exporting the metal is I think a dangerous assumption to make."

Still, producers of aluminum are predicting rising demand. Chinese usage will jump 30 percent this year and gain 15 percent a year until 2011, Rio's chief executive, Tom Albanese, said in September. Rusal forecast in August that global demand will more than double by 2030.

The Chinese drive to cut power consumption and reduce aluminum overcapacity may slow growth enough that the nation becomes a net importer of the metal in the fourth quarter of 2008, said Chris Ding, an analyst at China International Capital, the biggest investment bank in the nation.

Chinese net aluminum exports dropped this year after the government raised export taxes in 2006 to 15 percent from 5 percent. The government also removed a tax rebate on exports of some aluminum products to curb smelter expansion.

"Aluminum is a significant consumer of power and clearly five years ago China was an area with excess power," said Tim Barker, who helps manage and advise on $54 billion of assets at BT Financial in Sydney, including Rio. "That excess power production has disappeared."

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