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Alcoa Earnings Preview: How Long Will the Rally Last?

NEW YORK ( TheStreet) -- Aluminum or aluminium?

On the London Metals Exchange, the only bourse in the world where the light, malleable, corrosive-resistant metal is traded, it's the latter: al-yoo-MIN-ee-um. And when it comes to Alcoa (AA - Get Report), the third-biggest producer of aluminum/aluminium in the world, investors know to pay attention to the LME, situated at No. 56 on the appropriately named Leadenhall Street, in the heart of the Square Mile of the City of London.

That's because Alcoa shares tightly track the price of the metal on the venerable exchange (as do the equities of all aluminum producers). And that's because nearly two-thirds of Alcoa's business -- as measured by earnings before interest, taxes, depreciation and amortization -- comes from its "upstream" segment, which produces raw alumina and primary aluminum, as opposed to finished products like beer cans or aviation-grade sheet metal.
Inside an Alcoa aluminium smelter

As it happens, aluminum prices on the LME have marched steadily upward (for the most part) since the middle of last year, recently achieving their highest point -- about $1.20 per pound -- since early September 2008.

That fact seems almost as symbolic as Alcoa's unofficial status as the opener for each quarter's earnings season. The company is set to report its numbers for 2011's first period after the close of trading Monday.

Indeed, despite Japanese natural disasters, American budget crises, European debt crises, Chinese inflation combat, and Middle Eastern political upheaval, demand for aluminum is on the rise amid what appears to be a global economic recovery that still exists.

But the supply side has also helped. Mainly that's because the Chinese government, late last year, forced the country's highest-cost smelters to shut down, amid a kind of energy crisis in the People's Republic. Aluminum smelting, in case you don't know, is one of the most energy-intensive manufacturing processes ever devised by humankind. A midsized smelter consumes as much electricity per day as a city of one million people. Thus, the lowest-cost smelters in the world tend to be located near cheap sources of electricity (like Brazil, where enormous hydroelectric dams produce inexpensive wattage for nearby aluminum plants). Electricity in China is some of the most expensive in the world.

Another factor driving aluminum prices of late: the higher cost of oil, pushed up by the various Middle Eastern rebellions, especially Libya's civil war. Though petroleum isn't a raw material in aluminum production, higher crude prices have a tendency to get metals traders worked up about higher energy costs in general. The price of aluminum, because its manufacture requires so much juice, would theoretically receive support from higher energy costs.
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