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Value In Aluminum
With populations exploding in the emerging world and increases to money supply via stimulus occurring in the developed markets, interest in commodities from investors have exploded. Everything from gold to wheat is finding a way into investors' portfolios. Funds like the iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG) have had huge gains throughout 2010 as these assets are now more in demand. However, with almost all commodities setting new highs, finding "values" among the sector is difficult. Regardless of this fact, investors can find an interesting play in the base metals complex.
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More Than Just Cans and Foil
While copper taking the prize for hottest base metal, aluminum has remained relatively quiet. Aluminum prices rose around 4.5% in 2010, compared to an even stronger performance for lead and the iPath DJ-UBS Lead ETN (NYSE:LD). But with solid long-term fundamentals and short-term supply concerns already coming to fruition, aluminum may be one of the best metals play in 2011.
As emerging markets grow, demand for all of the base metals is growing equally as fast. The need for new infrastructure and consumer products is helping spur this demand. However, aluminum demand has grown by 38% over the last 10 years, out-pacing the 20% growth in other metals. Aluminum demand in China grew by 21% alone, in 2010. Growth in new places like South East Asia, Brazil and the Middle East has many analysts bullish on the long term prospects for the metal. Worldwide demand for aluminum is expected to double by 2020. In addition, analysts at HSBC estimate that demand will surpass supply by 300,000 tons in 2012. This will create a global shortage for the first time in over six years. This shortage plus the 14% predicted demand growth rate for 2011 could have aluminum seeing a 22% price jump. Some analysts have an aggressive target of $2,800 per metric ton, about $500 higher than today's prices.
Finally, aluminum may see another from an unlikely source. A few different asset managers are floating around the possibility of created a physically-backed aluminum ETF similar to the ETFS Physical Swiss Gold Shares (NYSE:SGOL) for gold. Citigroup predicts that the creation of such an ETF could raise prices by as much as 24%. If the new ETF gathers $2.5 billion in assets, it would hold roughly a fifth of world inventories of aluminum.
A Shiny Portfolio
With long-term demand growing and aluminum's current "cheapness" relative to other commodities, investors may want to add the shiny metal to their portfolios. Until one of the physically-backed ETFs launch investors wanting to bet on the price of aluminum can use the iPath DJ-UBS Aluminum ETN (NYSE:JJU) which follows a basket of aluminum futures contracts.
For investors wanting to gain additional leverage from using aluminum miners and producers, the newly launched Global X Aluminum ETF (NASDAQ:ALUM) follows 22 different miners including Rio Tinto (NYSE:RIO) and Norsk Hydro (OTCBB:NHYDY). The new fund charges 0.69% in expenses and should do well as aluminum prices and demand rise.
For investors craving even more value for aluminum investment, bellwether stock Alcoa (NYSE:AA) may be one of the best bets in the sector. Recently, the company has beaten analysts' estimates for revenue, cash flow and net income for their current quarter. Shares of the aluminum producer trade at a forward P/E of just 11. Similarly, Chinese large-cap producer Aluminum Corporation of China (NYSE:ACH) is equally as ignored in the sector.
Bottom Line
As the world's economy builds steam, various commodity prices have risen right along with demand. However, despite its good long-term fundamentals, aluminum prices have not kept pace with other metals. The industrial metal represents a value proposition in the commodities complex. Investors looking to add exposure to the metal can do so with the PowerShares DB Base Metals Long ETN (NYSE:BDG) or any of the previously mentioned stocks or funds. (Base metals may not glitter like gold, but they can still guide an investor to a conclusion about overall economic health. See Using Base Metals As An Economic Indicator.)
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IN PICTURES: 20 Tools For Building Up Your Portfolio
More Than Just Cans and Foil
While copper taking the prize for hottest base metal, aluminum has remained relatively quiet. Aluminum prices rose around 4.5% in 2010, compared to an even stronger performance for lead and the iPath DJ-UBS Lead ETN (NYSE:LD). But with solid long-term fundamentals and short-term supply concerns already coming to fruition, aluminum may be one of the best metals play in 2011.
As emerging markets grow, demand for all of the base metals is growing equally as fast. The need for new infrastructure and consumer products is helping spur this demand. However, aluminum demand has grown by 38% over the last 10 years, out-pacing the 20% growth in other metals. Aluminum demand in China grew by 21% alone, in 2010. Growth in new places like South East Asia, Brazil and the Middle East has many analysts bullish on the long term prospects for the metal. Worldwide demand for aluminum is expected to double by 2020. In addition, analysts at HSBC estimate that demand will surpass supply by 300,000 tons in 2012. This will create a global shortage for the first time in over six years. This shortage plus the 14% predicted demand growth rate for 2011 could have aluminum seeing a 22% price jump. Some analysts have an aggressive target of $2,800 per metric ton, about $500 higher than today's prices.
Finally, aluminum may see another from an unlikely source. A few different asset managers are floating around the possibility of created a physically-backed aluminum ETF similar to the ETFS Physical Swiss Gold Shares (NYSE:SGOL) for gold. Citigroup predicts that the creation of such an ETF could raise prices by as much as 24%. If the new ETF gathers $2.5 billion in assets, it would hold roughly a fifth of world inventories of aluminum.
With long-term demand growing and aluminum's current "cheapness" relative to other commodities, investors may want to add the shiny metal to their portfolios. Until one of the physically-backed ETFs launch investors wanting to bet on the price of aluminum can use the iPath DJ-UBS Aluminum ETN (NYSE:JJU) which follows a basket of aluminum futures contracts.
For investors wanting to gain additional leverage from using aluminum miners and producers, the newly launched Global X Aluminum ETF (NASDAQ:ALUM) follows 22 different miners including Rio Tinto (NYSE:RIO) and Norsk Hydro (OTCBB:NHYDY). The new fund charges 0.69% in expenses and should do well as aluminum prices and demand rise.
For investors craving even more value for aluminum investment, bellwether stock Alcoa (NYSE:AA) may be one of the best bets in the sector. Recently, the company has beaten analysts' estimates for revenue, cash flow and net income for their current quarter. Shares of the aluminum producer trade at a forward P/E of just 11. Similarly, Chinese large-cap producer Aluminum Corporation of China (NYSE:ACH) is equally as ignored in the sector.
Bottom Line
As the world's economy builds steam, various commodity prices have risen right along with demand. However, despite its good long-term fundamentals, aluminum prices have not kept pace with other metals. The industrial metal represents a value proposition in the commodities complex. Investors looking to add exposure to the metal can do so with the PowerShares DB Base Metals Long ETN (NYSE:BDG) or any of the previously mentioned stocks or funds. (Base metals may not glitter like gold, but they can still guide an investor to a conclusion about overall economic health. See Using Base Metals As An Economic Indicator.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Aaron Levitt
Aaron Levitt is a SABEW investment journalist and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Aaron is a graduate of The Pennsylvania State University where he studied Economics and International Business and he is an advocate for long-term investing with a global framework. You can follow his picks and pans at @AaronLevitt
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