China Growth Plays: Aluminum and Water

This was originally published on RealMoney. It is being republished as a bonus for TheStreet.com readers.

With China's benchmark Shanghai Composite Index down over 50% from its highs, everyone seems to believe that all the "hot money" has left China. As a value investor, I don't deal with hypes, fads or momentum. I look at cold, hard economic facts. And the facts are these: China's stock market is down over 50% from its high, the country continues to dominate as the low-cost producer, and 1.3 billion Chinese want everything we have.

Investors, both domestic and foreign, are gloomy on Chinese stocks. When events like this occur, I start digging around.

Almost everyone believed the Olympics would be a boon to Chinese equities. It wasn't, but the Olympics displayed to the world that China is certainly no hype and is here for the long haul. Let's look at some businesses that will surely benefit from China's long-term growth and enrich patient investors in the process.

Aluminum Remains Sturdy

Like all commodities, aluminum has had across-the-board price increases, from about $1,800 a ton in 2005 to nearly $3,000 a ton today. But recently, equity prices in aluminum companies across the globe have fallen to levels not seen for quite a while.

Energy is a major input in aluminum production, and the high cost of oil has hurt margins. In the U.S., aluminum titan Alcoa(AA Quote) is off 30%, while the smaller Century Aluminum(CENX Quote) is off more than 40%.

In China, however, Aluminum Corp of China(ACH Quote), commonly known as Chalco, is down nearly 70% from its high. Clearly, the rapid rise in Chinese equity prices a couple of years ago fueled Chalco's sharp rise, and subsequently the stock got clobbered with the similar rapid fall in equity prices.

But the long-term economic case for aluminum is favorable. Since energy accounts for as much as half the cost of making aluminum, the recent $30 drop in crude oil and $4 to $5 drop in natural gas bodes very well for aluminum producers. Additionally, aluminum supplies are tight. The global days of inventory of aluminum sits at about 29 days today, vs. 48 days in 2002 and 85 days in 1994.