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XMFSinchiruna (27.50)

Gold not for you? Here's the next great commodities boom!

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June 27, 2008 – Comments (13) | RELATED TICKERS: ACH , RTP.DL

Please have a look at my last article.  I strongly believe we are in the early stages of a bull market in Aluminum.  The article I think lays a pretty solid foundation for why I believe so.  I'd love to know what you think.  As always, opposing views are also most welcome.  Let's talk about it... come to our own conclusions... that's what makes CAPS so great!  :)

Fool on!

13 Comments – Post Your Own

#1) On June 27, 2008 at 7:41 PM, ATWDLimited (< 20) wrote:

Spot on. Steel prices have jumped due to high iron ore prices and higher priced coal. This means places where steel is used may be replaced by a cheaper alternative, aluminum, and the bauxite ore will be big. Time for aluminum to shine, and hold my soda.

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#2) On June 27, 2008 at 8:08 PM, DarkToast (50.66) wrote:

Interesting article. Seems like a solid analysis and I am going to use some of my free spots in CAPS for some aluminum stocks.

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#3) On June 27, 2008 at 8:31 PM, AnomaLee (28.62) wrote:

I agree with you on the commodity pricing of aluminum. However, I am still very concerned on the rising input costs for aluminum producers.

I just wanted to review a past debate about gold. I expect your score to rise very much relatively soon since I'm sure gold is set to rise thanks to Ben Bernanke and recent boom in demand caused by investors concerned about inflation (especially from Vietnam)

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#4) On June 27, 2008 at 8:54 PM, ahabswife (62.69) wrote:

Aluminum prices have been going up for about the last month.

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#5) On June 27, 2008 at 10:07 PM, madcowmonkey (< 20) wrote:

Good post Sinch. I made a madcowAList portfolio, because I could see where AL was headed back in February. I ended up getting bored with it though, but still kept the AL stocks. The big concern is the increased cost in energy, but now also transportation.

I am still a firm believer that AL stocks will rise, but maybe not as much as before. I am glad others are beginning to discuss it though. ACH seemed like a great play for me, but I am at the losers table with it right now still holding patiently (sweating though). There are some interesting plays in the sector and I wish you luck with your positions. ACH, BHP, RIO. BTW, I hesitated on KALU and then figured I would try the old trend idea. All it gave back was a good swift kick, thankfully I had a stop put in place. I usually leave myself out in the open.

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#6) On June 28, 2008 at 12:00 AM, devoish (98.37) wrote:

I have opined that the metals bull run is about to turn downward. I think its a warning that a Chinese company just paid double for steel from Australia. Its like paying double for a house in Orange County in 2006.

The Chinese sell to the US and Europe. The number one and two metals industries are construction and auto manufacturing. In the US construction has fallen off a cliff due to overbuilding. Commercial is about to stop. The American Institute of Architechts survey says they aren't drawing barely anything. No drawings, no buildings. We are buying fewer cars here and the cars we are buying are smaller with half the steel and aluminum in them. Asia has replaced our car buying but not with SUV's. And I suspect tighter budgets will reduce our car buying even more as we work off the glut of  2.5 (I think) cars/ household we have just like we have to work off the housing glut and CRE glut.

Europe is close behind us, so who will follow them I have to ask?

China is building like crazy and consuming tons (kilotons) of metal. Demand will never end? Sounds like California in 2005. China has been collecting dollars for years now. If ours aren't worth crap how is it theirs are?

Right now I think the only safe economys are energy independent ones. Russia, the Middle East and Brazil for example.

This chart looks as sustainable as Las Vegas real estate to me.

And finally "credit contraction" I think, means deflation.

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#7) On June 28, 2008 at 12:38 AM, binv271828 (< 20) wrote:

Excellent post and excellent article! I think you are right on!

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#8) On June 28, 2008 at 5:39 AM, kdakota630 (29.57) wrote:

I think your analysis is right on the money.

Disclosure:  recently acquired positions in ACH, RIO and BHP already.

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#9) On June 28, 2008 at 10:14 AM, XMFSinchiruna (27.50) wrote:

ATWDLimited

Yup... find your bauxite miners and select your vertically integrated aluminum producers with access to steady energy supply.  Aluminum has a long way to go to catch up with other commodities, but the ride is about to begin.

DarkToast

Glad I could offer up an investment thesis.  This one arose out of pure time spent researching news about various supply-side issues.  I had been tracking the Western Australia issue, the South African power supply issue... I had seen the impact of the January snowstorms in China on coal production.  When I saw that Alcoa was cutting production in half at a TX facility... I decided to try to guage the potential impact of all these events cumulatively.  In a captain's lingo, this really feels like the calm before the storm for aluminum.

AnomaLee

On rising input costs... it's definitely an important issue to track.  I think it will play out just like in steel.  Aluminum producers will all have equal pricing power in the early stages... they will pass the early increases along directly.  Then, and perhaps sooner than in steel because of the number of other strains upon potential buyers, at some point they will begin to worry about further rises eroding demand.  At that stage, you want to own the well vertically integrated producers... the guys that mine their own bauxite and refine it to alumina... the world will always need aluminum, and those with vertical integration will be the ultimate arbiters of price.

Here's another thought.... this is all yet one more reason to consider the metal recyclers.... recycling is huge in aluminum, and will be more so as prices skyrocket.  MEA, SMS... still looking great long-term IMO.

On gold, investment demnd is up.  After adding 48 tons of gold in the last 7 weeks, GLD now holds more gold than China or the ECB.  :)  Gold's going to $1,200 in 2008, $1,650 for a conservative long-term target.  While it might be tough to climb aboard the coal train this late in the game, not so for gold.  The correction cycle currently underwaycontinues to provide an attractive entry point.  Sub-$1000 will soon be history, until the super-cycle plays itself out and recovery can become a reasonable target again.

ahabswife

True... up 30%... but still only 15% above prices this time last year.  The point is, though, how much further they have to go.  Look to iron ore and coal for examples of how big the increases can be.  100%  200%?  More?  This is still in the early stages.

madcowmonkey

Me too.  I had owned AA a while back and finally sold at only a moderate gain.  ACH I first bought at $50, which looks high right now, but I examined the valuation at the time and $50 ACH remains undervalued for the stock.  So you can imagine what I think about $30 ACH.  I've been pressing my position all the way down, and as much as I would love to double down here, I can't.  When I write an article, I have to wait before trading any of the companies mentioned.  I thought it was more important to get the word out about what I saw as an unusually great opportunity than to pick up more myself.  :)  

Kind of like the case with CDE.   At $5 per share it was incredible cheap on a book value basis, so imagine how cheap I now think it is at $3.  :)  The markets can be extremely irrational at times.  ACH was already oversold before the recent profit warning, so logically it should not have retreated on the news.  The fact that it did is like a gift for the savvy Fool.

devoish

Thanks for bringing another perspective to the table.

I really agree with you about this statement:

Right now I think the only safe economys are energy independent ones. Russia, the Middle East and Brazil for example.

I think long-term Brazil and Russia will be the economies standing tallest even in a serious global glut. I don't invest in the Middle East because of the threat of military escalation in the region.

I also agree that China should not be regarded as some limitless source of demand like a second Sun for the Earth.  I think China needs to be watched very carefully for signs of real trouble.  So far, though, the demand is still chugging along.   I raised the question of eroding demand in my last article about steel.

Your points about eroding demand in the U.S and Europe are certainly spot on as well.  But I still think demand from emerging economies is growing faster than these disrupted global supplies of Aluminum, so I'm happy to have some Aluminum exposure.  If demand from China begins to crumble, you can bet I'll issue an update here and be looking to reduce exposure to many of the industrial metals (except silver).  :)

 binv271828

Thanks!  And thanks for the idea about putting peoples' CAPS profile links in one's response.  I think it's great.  I just noticed you can just drag the names down (maybe because I have a new browser?).  Anyway... it's a nice touch.

 kdakota630

Thank you.  I wish you much success with your picks.  Those 3 are probably my favorite 3 stocks for non-precious metals.  :)

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#10) On June 28, 2008 at 4:50 PM, Nainara (< 20) wrote:

Energy is a major cost for aluminum smelters. This is reflected in the locations of some of the newest Aloca and Chalco smelters coming online: Iceland and the middle east.

While I'm personally a holder of Chalco, my chief worry is that input costs such as bauxite and especially energy will continue to climb (China recently raised electricity by 4%) and eat away at the margins.

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#11) On July 01, 2008 at 10:10 AM, XMFSinchiruna (27.50) wrote:

http://seekingalpha.com/article/83359-aluminium-prices-are-expected-to-soar-by-more-than-30

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#12) On July 01, 2008 at 10:43 AM, XMFSinchiruna (27.50) wrote:

http://www.mineweb.com/mineweb/view/mineweb/en/page36?oid=55621&sn=Detail

UBS reckons global aluminium market heading for deficit this year and next

Energy shortages are likely to lead to a shortfall in aluminium supply, and higher prices, over the next two years according to a UBS analysis.

Posted:  Monday , 30 Jun 2008

SYDNEY (Reuters) - 

The world aluminium market was heading for a 200,000-tonne deficit this year and in 2009 as coal supplies turn scarce and producers are forced to cut output, banking group UBS said on Monday.

"We expect market fundamentals to continue to tighten as global constraints on energy supply grow and impinge on the aluminium industry," UBS said in a report on the sector.

Prices for the metal should respond on the upside to the deficits, averaging $3,150 a tonne, or $1.43 a pound, this year and $3,525 a tonne, or $1.60 a pound, in 2009, it said.

Aluminium averaged $2,640 a tonne, or $1.20 a pound, in 2007.

Three-month London Metal Exchange-traded aluminium stood at $3,115 a tonne early on Monday. The contract hit a record $3,310 a tonne in May 2006.

Western world unwrought aluminium stocks rose to 1.67 million tonnes at the end of May 2008 versus 1.58 million in April, International Aluminium Institute data released last week showed..

Due to higher coal prices the production cost of aluminium has increased, forcing smaller smelters operating at close to marginal costs to close, according to UBS.

As a measure to provide more power for civilian use, authorities in some countries have curtailed power to energy-intensive industrial users like aluminium smelters, making less aluminium available to the market.

BHP Billiton Ltd announced it was reducing its aluminium production at three African smelters by 10 percent, putting the total annual output loss at just over 120,000 tonnes.

Rio Tinto Ltd/Plc has also cut output 10 percent, or 35,000 tonnes, at its Tiwai Point smelter in New Zealand to reduce demand on the national electricity grid.

Thermal coal contract prices are up more than 100 percent to $125 a tonne, while spot prices at Newcastle port in Australia and Richards Bay in South Africa remain volatile with prices at $163 a tonne and $146 a tonne FOB respectively for the week ending June 20, UBS noted.

World production of 37.85 million tonnes of primary aluminium in 2007, compared with 37.23 tonnes consumed, according to the Australian Bureau of Agricultural and Resource Economics.

 

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#13) On July 07, 2008 at 7:19 AM, klemenv (99.75) wrote:

Are you guys really sure that Europe is struggling or about to struggle?

There are many countries where economy is growing by 5~7 % (e.g. Slovakia, Poland, Slovenia, Czech Republic, Hungary, Bulgaria, Romania, etc.) There is shortage of skilled workers. Unemployment at historic low. Inflation is high, but that is why we have central bank to keep interest rate high.

I see many bulish trend in housing. Both individual and apartment building. Maximum for mortgage is 60% LTV, annuity of 33% of net income,  no optional ARM, no foreclosures... 

I don't see slump in sales of new cars. 

Yes, oil gets more expensive, but cars are getting more and more efficient. Food is getting more expensive, but you always have relatives in the country. Oil gets more expensive, but why don't convert heating to wood or heat pumps?

The way I see it, economy is doing moderatly great to fine. 

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