Aluminum a Growth Stock in Asia

MELBOURNE: As China reduces sales of aluminum onto the world market and buys more of the metal from overseas, the stock of its biggest producers might well be on the rise.

China's net aluminum exports fell this year as the government cut tax incentives for overseas sales and curbed smelter expansion to save energy and ease pollution.

The country, the largest consumer of aluminum, 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 in October. Morgan Stanley and UBS also forecast higher prices. That would boost the shares of the world's biggest producers: Alcoa, Rio Tinto Group and Norsk Hydro, UBS said. The top five, including Aluminum Corporation of China, or Chalco, and Moscow-based United Co. Rusal, account for 38 percent of global output, according to HSBC Holdings.

"The outlook for the aluminum industry is favorable because of worldwide demand," led by China, said Peter Klein, a fund 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 was considering buying more shares of Alcoa.

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

Since then, BHP Billiton, the world's biggest mining company, has made a stock offer for Rio Tinto in what would be one of the world's biggest takeovers. Rusal, the second-largest aluminum producer, was created this year through the merger of Russian Aluminium, Sual Group 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, a fund manager at Ausbil Dexia in Sydney, including Rio Tinto 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. Oslo-based Norsk Hydro, a major European aluminum producer, 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 was trading near $2,500 this week. It will average $3,266 a ton in 2009 according to Andrew Keen at Sanford Bernstein.

Alexander Bulygin, the chief executive of Rusal, said in March that aluminum might reach a record $4,000 a metric ton by next year.

Expanding supplies may yet 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 fund 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. China's usage will jump 30 percent this year and gain 15 percent a year until 2011, Tom Albanese, the chief executive of Rio Tinto, said in September. Rusal forecast in August that global demand would more than double by 2030.

China's 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, a Beijing-based analyst at China International Capital, the nation's biggest investment bank.

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