Back when Peru Copper (AMEX:CUP) was facing deal drama, state-owned Aluminum Corp. of China (Chinalco) was the final buyer. Chinalco must change its name sooner or later, not only because the firm's scope is clearly wider than aluminum alone, but also because it's too easily confused with subsidiary Aluminum Corp. of China Ltd (NYSE:ACH), also known as Chalco. The latter firm, which is solely focused on aluminum, is the one I will focus on today.

Consumption junction
Chalco's chairman has estimated that aluminum demand will rise about 33% in China this year to 12 million tons, which is nearly one third of world demand, and not far shy of the country's total capacity.

Here's just one window into the demand outlook. Chinese carmaker Chery Automobile recently announced its millionth assembled vehicle. Chery is now able to roll out 400,000 cars a year -- in other words, it's putting the pedal to the metal. Who do you think peddles all that metal?

For its part, Chalco plans to produce 3.5 million tons of aluminum this year. It's looking to boost that figure to 5 million tons by 2010 via a dogged acquisition strategy that's already fetched a few deals. The Chinese government's removal of a tax break on rod and bar shipments will probably send a lot of smaller competitors right into Chalco's outstretched arms. And because the company's parent is state-owned, I wouldn't worry about liquidity problems standing in the way of these deals -- if the Party wants an aluminum giant, it will get one.

Too late, baby?
If you've watched Chalco's American depositary receipts rise more than 70% these past 10 trading sessions, you might surmise that it discovered a cure for cancer, or at least reported a ridiculous blowout of a first half. The firm did outpace analysts' estimates, which juiced shares a bit, as did the announcement that the company would maintain its dividend payout even though profit came in lower than last year. But I believe the real source of octane comes from an outside factor that has little to do with Chalco's individual merits.

Chalco's Hong Kong listing is of utmost significance here. On Aug. 20, a pilot program was announced in Tianjin, allowing a select group of mainland Chinese investors to invest in Hong Kong securities for the first time. The mere hint of a nationwide lifting of cross-border trading restrictions has been enough to drive a frenzy of activity in so-called H shares -- Hong Kong-listed Chinese companies.

The key driver here is the huge gap between valuations afforded H shares and Shanghai- and Shenzhen-listed A shares. The mainland benchmark index sports a price-to-earnings ratio of about 50, while H shares trade at a comparatively prudish multiple of roughly 21.

The speculation, then, is that mainlanders will give the bum's rush to the latter market and bid up pretty much every stock that doesn't have a "4" in the ticker -- the Mandarin pronunciation of four is a homonym for "death." I can't begin to think seriously about Chalco as an investment until this "mainlander put" blows over.

Fun with Mercantilism
Another point I want to touch on is about that tax break reversal I mentioned earlier. China could become a net importer of aluminum in the relatively near future. This is the government's desired outcome because:

  • Aluminum production is very energy intensive, and the country's desired energy security ultimately trumps the narrower desire of aluminum self-sufficiency.
  • China has no interest in blowing its precious bauxite reserves by unsustainably flooding foreign markets. This shift away from being a net exporter of the metal would follow the trend set in both the oil and coal markets.

This national strategic maneuvering indicates that while Chalco will be growing its capacity at a prodigious rate for years to come, the firm's presence is likely to support global aluminum prices. That would be a big relief for aluminum producers elsewhere because their metal has lagged behind peers like zinc and lead over the course of the commodities rally.

Alternative plays
Here in the U.S., I'm less interested in Alcoa (NYSE:AA) than I am in lesser-known Century Aluminum (NASDAQ:CENX). The California firm has a diverse asset base for its size, strong connections to a dominant Swiss commodities dealer, and an 18% operating earnings yield. It trades at less than six times earnings before interest and taxes, while Alcoa is valued at more than nine times that figure.

As for international operators, my favorite name is Motley Fool Income Investor selection Norsk Hydro (NYSE:NHY), a company that benefits from its home country's vast hydropower resources. There's also Alumina (NYSE:AWC), an Australian outfit that pays a very nice yield and has turned out monster returns on equity for several years now.

Just because Chalco gets all the media attention these days doesn't mean it's the best value in the aluminum patch. If you're interested in the metal, I recommend giving these attractive competitors a good hard look.

Further Foolishness:

  • America's major force in aluminum just experienced a force majeure.
  • We've tipped Alumina as a foreign value with star power.
  • This is why Hydro seems to have a particularly shiny future.

Fool contributor Toby Shute doesn't own shares in any company mentioned. Norsk Hydro is an Income Investor recommendation.

The Motley Fool's disclosure policy is all about the fundamentals.