Hard to believe that aluminum was once more highly valued than gold, but it was. These days, though, aluminum producers have yet to get the same sort of love that has been lavished on steel, gold, and copper companies. But could solid industry fundamentals still mean a run-up in aluminum prices is possible?
Canadian aluminum giant Alcan's
Demand and pricing don't seem to be Alcan's major problems. If you strip out the product shipments produced by Novelis last year, production was up about one-third (though a fair chunk of that has come from increased ingot sales to Novelis that had been considered intercompany). On the pricing side, although the company is seeing some lower premiums, per-ton pricing on the London Metal Exchange has risen almost 8% from last year.
The issue, though, is costs. The production of aluminum requires copious amounts of electricity and power, and energy prices are quite a bit higher now than they were last year. Making matters worse, raw materials such as caustic soda and maritime freight costs aren't helping. To be fair, though, this is not a problem unique to Alcan; Alcoa
If these two companies can get a hold of their operating costs, there could be better times ahead. Although supply growth is increasing faster than demand, there is still a net shortfall of aluminum, and inventories have been declining for some time now. Assuming that the revivals in commercial aerospace and commercial construction continue, and assuming that China continues to consume more and more aluminum internally, the demand picture looks pretty healthy.
Alcan would seem to be the cheaper of the two today, but both stocks should do better if cost pressures ease up a bit. It's hard for me to get excited about stocks whose estimates have been falling, but I won't rule out the possibility that these two large companies have shinier days ahead.
For more metal missives:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
