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Aluminum Is Over The Hump
If your concern about the aluminum industry not recovering in the foreseeable future stemmed from a stunningly high supply and an amazingly weak demand, you weren't alone. The analysts have been pessimists for pretty much the same reason. And, it wasn't an unmerited worry. Aluminum inventories didn't even peak until August of 2009 - well into the recovery. Moreover, inventories didn't start to come down until March of this year, after names like Alcoa (NYSE:AA) and Century Aluminum (Nasdaq:CENX) had been mentally written off as lost causes.
The underpinnings are changing though, setting up an opportunity few investors have yet to recognize.
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Not Yet
Though we were neck-deep in a recession by mid-2008, aluminum providers continued to ramp up production right through 2008 and into August2009. In fact, inventory levels peaked at all-time highs in late 2009, as the London Metal Exchange warehouse inventory level hit 4.6 million metric tons in August of last year - and stayed there through early 2010. (For related reading, see The Impact Of Recession On Businesses.)
Aluminum companies underscored the backed-up inventory levels in early 2009, as profits - or losses - for these stocks hit their lowest levels of the recession then. Aluminum Corporation of China (NYSE:ACH), for instance, lost 26 cents per share in the first six months of 2009, which happened to be the worst six-month period for the company throughout the worst of the economic turmoil. Alcoa, Kaiser and Century were also at their worst in the first half of 2009.
Though earnings started to finally improve in late 2009 and early 2010, it was hardly something investors would consider success. These companies limped their way back into the black by early 2010, but there was no meaningful rebound in revenue.
The killer for these stocks, however, was the fact that the LME's inventory levels were still stuck at the 4.6 million ton mark as of March of this year. If the industry was on the mend, somebody should be buying the stuff right?
Putting two and two together, investors drove these stocks lower by 38% over the first six months of the year.
Finally
Given how long it took, many investors thought it was never going to happen. But, it has.
As of February of this year, aluminum prices have reversed their downtrend, rebounding from 60 cents per pound to about $1.10 per pound, and the uptrend is still going strong.
That's the first round of good news for the industry, but not the only one. After being stuck at amazingly high levels for 10 months, the London Metal Exchanges aluminum inventory levels are also starting to fall. At last look, 4.3 million tons were ready to ship. It's a slow start, but a start all the same.
Over the Hump, Once and for All
The final bullish blow here is a one-two punch; these same stocks have bounced back 48% since the midpoint of the year, and for good reason - earnings are really starting to grow again.
Kaiser Aluminum's (NYSE:KALU) profit of 71 cents in the second quarter of this year was the best quarter since Q1 of 2009 (and profits were in a downtrend at the time). Alcoa is back in the black - consistently - as well, and posted its best quarter since the third quarter of2008 in the second quarter of this year. In both cases, and all cases for that matter, earnings are expected to keep growing.
Bottom Line
The price and consumption trends are the key here. While things can and do change, now that the price and inventory trends are in motion, a reversal is the less likely of the possible outcomes here - especially knowing that the industry sees another 8% increase in aluminum demand for 2011 following the 13% bump in demand in 2010.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
The underpinnings are changing though, setting up an opportunity few investors have yet to recognize.
IN PICTURES: 8 Tips For Starting Your Own Business
Not Yet
Though we were neck-deep in a recession by mid-2008, aluminum providers continued to ramp up production right through 2008 and into August
Aluminum companies underscored the backed-up inventory levels in early 2009, as profits - or losses - for these stocks hit their lowest levels of the recession then. Aluminum Corporation of China (NYSE:ACH), for instance, lost 26 cents per share in the first six months of 2009, which happened to be the worst six-month period for the company throughout the worst of the economic turmoil. Alcoa, Kaiser and Century were also at their worst in the first half of 2009.
Though earnings started to finally improve in late 2009 and early 2010, it was hardly something investors would consider success. These companies limped their way back into the black by early 2010, but there was no meaningful rebound in revenue.
The killer for these stocks, however, was the fact that the LME's inventory levels were still stuck at the 4.6 million ton mark as of March of this year. If the industry was on the mend, somebody should be buying the stuff right?
Finally
Given how long it took, many investors thought it was never going to happen. But, it has.
As of February of this year, aluminum prices have reversed their downtrend, rebounding from 60 cents per pound to about $1.10 per pound, and the uptrend is still going strong.
That's the first round of good news for the industry, but not the only one. After being stuck at amazingly high levels for 10 months, the London Metal Exchanges aluminum inventory levels are also starting to fall. At last look, 4.3 million tons were ready to ship. It's a slow start, but a start all the same.
Over the Hump, Once and for All
The final bullish blow here is a one-two punch; these same stocks have bounced back 48% since the midpoint of the year, and for good reason - earnings are really starting to grow again.
Kaiser Aluminum's (NYSE:KALU) profit of 71 cents in the second quarter of this year was the best quarter since Q1 of 2009 (and profits were in a downtrend at the time). Alcoa is back in the black - consistently - as well, and posted its best quarter since the third quarter of
Bottom Line
The price and consumption trends are the key here. While things can and do change, now that the price and inventory trends are in motion, a reversal is the less likely of the possible outcomes here - especially knowing that the industry sees another 8% increase in aluminum demand for 2011 following the 13% bump in demand in 2010.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
James Brumley
James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.
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