What happened
Shares of aluminum companies bounded higher on Wednesday, thanks to a report that China ordered curbs on aluminum output during the winter heating season to cut pollution. As of 3 p.m. EST Century Aluminum (CENX 1.15%) was up more than 10%, followed by Alcoa (AA) up 9%, Aluminum Corporation of China (ACH -8.74%) up 8%, and Kaiser Aluminum (KALU -0.92%) up nearly 4%.
So what
According to a story on Bloomberg, China ordered steel and aluminum production curbs in 28 northern cities during the winter heating season, to step up efforts to battle pollution. The plan would cut capacity for both aluminum and alumina by about 30%. Those figures represent about a 5% loss in China's annual aluminum production and a 9% drop in alumina output, if the cuts go into effect for the full winter period of November to March.
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Because of that, an analyst at Citi said that the moves, "if executed, could bring potential upside risk to aluminum" and alumina prices in China, which is both the world's top producer and top consumer of metals. Meanwhile, Alcoa CEO Roy Harvey said that the aluminum curtailments could be a "game changer" for the market.
However, before today's news analysts had been growing cautious of the red-hot aluminum market. That's after Century's stock jumped 65% since the start of the year, while both Alcoa and Aluminum Corporation of China were up 20% through the first two months of 2017. Just yesterday Deutsche Bank downgraded Century Aluminum from hold to sell, citing its valuation following the stock's recent rally. That said, the analyst did see upside to aluminum demand, which is why the bank increased its price target for Century from $9 to $10. The bank also boosted Alcoa's price target from $32.50 to $37 but maintained its hold rating.
Now what
If China follows through on its pledge to cut aluminum output, it could cause a shortage in the country, which would likely cause prices to spike. Those higher prices, of course, would pad the bottom lines of aluminum producers. That said, these stocks have already risen quite a bit this year on the hope of higher prices, which is why investors might want to watch this rally from the sidelines to avoid getting burned should this red-hot sector cool off.
