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Why Shares in Alcoa Surged This Week

By Lee Samaha – Dec 16, 2021 at 5:05PM

Key Points

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The aluminum products company benefits from solid aluminum prices and a positive demand/supply environment.

What happened

Shares in bauxite, alumina, and aluminum products company Alcoa (AA 1.02%) were up 10% in the week as of 3 p.m. ET Thursday. The move comes based on an improvement in the outlook for aluminum prices.

It comes down to a combination of factors, but probably the most prominent was the 9.6% rise in the producer price index announced this week. The index measures the change in selling prices received for the output of domestic producers.

In a nutshell, the data confirmed fears that inflationary pressures are rising in the economy. Hence, investors sought out stocks that benefit from increases in raw material prices, such as Alcoa. In addition, Alcoa was boosted by the news that China's aluminum output fell in November compared to October. This was due to an explosion at a smelter and production cuts to meet climate aims (reducing greenhouse gas emissions) and responding to energy shortages.

Lower production in China matters a lot because the country is the leading player in the aluminum market. In addition, investors in Alcoa were pleased to hear of the closure of a smelter in Washington state as part of its ongoing review of its operating assets.

So what

These movements are part and parcel of investing in the commodity-related sector. Anything seen as restrictive to supply, with the demand side remaining relatively stable, will make investors feel more positive about prices. That's good news for Alcoa. Throw in the inflation data, and, naturally, investor attention will zero in on Alcoa.

Long rows of aluminum rolls stacked on top of one another in a warehouse.

Image source: Getty Images.

Now what

As ever, the question is how sustainable the move might be? Commodity prices are notoriously volatile, and high prices usually induce supply increases down the line and possibly some demand destruction.

On the other hand, it's difficult not to think that the lingering COVID-19 pandemic has led to supply issues that could extend into 2022 and even turn into structural problems. As such, provided global growth holds, Alcoa's near-term prospects look good, and the stock offers a decent way to profit in an inflationary environment.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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