Fears that the ongoing sovereign debt crisis in Europe could materially derail global economic growth has prompted a commodity sell-off over the last couple of months. Leading prices lower have been the key industrial metals - copper, nickel, lead, zinc and aluminum - all of which have retreated materially from their recent April highs.
But could the recent plunge in metals prices, and the shares of companies mining and producing these commodities, be a bit overdone? In the case of aluminum and the shares of aluminum producers, the answer could be yes.

IN PICTURES: 20 Tools For Building Up Your Portfolio

China Moves To Curb Aluminum Production
After falling roughly 17 percent from their April highs, aluminum prices have now fallen to below the cost of production in China, a leading aluminum producer. That, plus the fact that the Chinese government recently boosted electricity prices for marginal aluminum producers in a bid to curtail excess production, will likely have the desired effect of closing down a lot of excess capacity - thus raising prices.

Aluminum Producers Could See Profits Soar When Metals Demand Rebounds
That's good news for major world-scale aluminum producers like Alcoa (NYSE: AA) and Rio Tinto (NYSE: RTP), which acquired its exposure to the aluminum business when it bought Alcan in 2007. Unlike Chinese producer Aluminum Corp of China (NYSE: ACH), both Alcoa and Rio are recognized as low-cost producers and are well-positioned to realize major profit gains when aluminum prices recover. According to a recent report published by the Royal Bank of Scotland, by 2012 Alcoa's profits could double, and Rio's aluminum unit could generate a profit of $1.86 billion - a huge increase over the $111 million it has made in its most recent six-month period. Another broker, Macquarie Research, recently made Alcoa its top pick in the mining sector.

Another interesting situation is Noranda Aluminum (NYSE: NOR). The company recently came to the market at an issue price that was 70 percent below the value that it had initially sought from investors.

Consumer Electronics: A Growing Factor In Overall Aluminum Demand
This bullish call mirrors other similar positive views on the metal that appear to be grounded in the belief that aluminum demand, particularly from emerging markets, is set to grow sharply over the coming years. Meanwhile, traditional demand from the auto and airline makers is augmented by fast-rising demand from the manufacture of consumer electronics that are mostly in Asia. That could be a huge new source of demand as an expanding middle class in China has the potential to become a key driver of consumer product demand. As a result, by 2015, aluminum prices could be 30 percent higher then they are today.

The Bottom Line
China's recent move to curtail excess aluminum capacity could be the catalyst that halts the downtrend in aluminum prices - and sets the stage for a recovery. (For more, see A Beginner's Guide To Precious Metals.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  5. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  6. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  9. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  10. Investing News

    Corporate Bonds or Stocks: Which is Better Now?

    With market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!