Alcoa Primed for Aluminum Surge

Alcoa may be among the metal stocks best positioned to benefit from rebounding demand for aluminum, led by China's growth.
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Alcoa(AA) - Get Report, the third largest producer of aluminum in the world, may be among metal stocks best position to benefit from rebounding production and pricing for aluminum this year.

The metal averaged $1,420 per metric ton for spot delivery on the London Metal Exchange in January 2009, touched a high of $2,342.75 in January this year and is currently trading at $2,105 per ton. Alcoa,

Aluminum Corporation of China

(ACH) - Get Report

, and

Alumina

(AWC)

have already logged-in handsome gains during this rally, which saw their shares soaring 167%, 121%, and 187%, respectively.

Alcoa is preparing to handle increased aluminum demand by joining with Saudi Arabian Mining Co. (Ma'aden) in December to build a $10.8 billion aluminum complex to target the Middle East region starting 2013.

Aluminum Corp., China's largest maker of aluminum, demonstrated further confidence in the outlook for the metal by announcing plans this month to develop and operate a $1 billion smelter in Malaysia in collaboration with billionaire Syed Mokhtar Al-Bukhary. The smelter will have an initial annual production capacity of 330,000 metric tons that will eventually increase to 1.25 million tons.

After declining 14% during 2009, world aluminum production is likely to increase by 5% during 2010 to 38.5 million metric tons, according to forecasts by the Australian Bureau of Agriculture and Resource Economics (ABARE). A number of smelters that reduced output or shut down earlier are likely to restart or increase production during the year in response to the expected 8% increase in consumption.

Furthermore, ABARE forecasts an 18% increase in aluminum prices during 2010 when compared to a 34% decline last year.

Alcoa's bright future

Alcoa accounts for approximately 40% of global aluminum production and operates in 31 countries. This stock has eight "buy" recommendations, eight "holds" and three "sell" ratings, according to TheStreet's analyst ratings guide.

The bullish sentiment stems from the impressive 18% sequential increase in Alcoa's revenue during Q4 FY09. The company's cash balances almost doubled to $1.5 billion with a free cash flow of $761 million, turning positive for the first time since the second quarter of 2008.

The company's recent joint venture with Ma'aden is likely to result in revenues soaring. The deal involves Alcoa setting up a 1.8 million ton per year refinery, a 740,000 ton per year smelter, a 4 million ton per year bauxite mine, and a rolling mill with an annual capacity of up to 460,000 tons.

The company forecasts a demand growth of 10% (compared to 6% growth in 2009) for 2010, half of which is expected to come from China, according to Klaus Kleinfeld, Executive Vice President and CEO. The management expects the improvement in the Automotive and Heavy Truck & Trailer markets to drive this demand.

According to analysts polled by Bloomberg, Alcoa is estimated to generate total revenue of $21.9 billion during FY10, an increase of approximately 20% over FY09. Earning per share is projected at a positive $0.89 as opposed to a loss in FY09.

Strong Chinese demand

"The market is looking for better demand, which is augmented by expectations of restocking" according to Daniel Brebner, an analyst at

Deutsche Bank

(DB) - Get Report

AG. "This should lead to stronger metals prices. Also, weather issues could support energy, helping metals such as aluminum."

China, which is both the world's largest producer and consumer of aluminum, is poised to lead the global consumption recovery.

Aluminum production in China is likely to increase by 9% during 2010 to 14.5 million metric tons. China produced 13 million metric tons during 2009, helped by the spurt during the second half of the year, despite a weak first half.

Both autos and aviation, the industries with the most aluminum demand, are set to register strong growth in China during 2010.

According to data released by the China Association of Automobile Manufacturers, car sales in January 2010 jumped 116% over the same month last year. Analysts expect annual auto sales in China to grow by 10% during 2010, which will help drive demand for the metal. Moreover, domestic air travel in China is estimated to grow at a similar pace.

Chinese aviation is bullish again growing capacity aggressively, taking delivery of almost one in two aircraft bound for Asia Pacific airlines in 2009 - a proportion it will repeat in 2010 and 2011, according to a report by Sydney-based Centre for Asia Pacific Aviation.

According to market research firm RNCOS, in the short-term, China is expected to see aluminum price behaving positively to every continuing sign of revival in the economy. This is also well-supported by the immediate unavailability of the metal.