Aluminum producer Alcoa still has room to rally
This article was written exclusively for Investing.com
- Multi-year aluminum summits
- Inventories tend to go down; Production costs rise
- Chinese sales did not stop the rally
- Alcoa: global producer with an upward trend in profits
- Levels to watch in AA stocks
may have the highest profile of the base metals that trade on the London Metal’s Exchange, but is the most liquid. Aluminum futures are traded most actively on the world’s leading base metals exchange, with the most tonnes changing hands every day. Aluminum is a very liquid market because the metal has many industrial applications.
Energy is one of the direct costs of goods sold as inputs in aluminum production. Additionally, the mining, smelting, refining and processing of aluminum has been a dirty business, leaving a substantial carbon footprint. In 2020, China was the world’s largest producer of aluminum:
Source:Bizvibe
The United States is ninth in global production, but Alcoa (NYSE 🙂 based in Pittsburgh, Pa., Is the sixth largest aluminum producer:
Source: Bizvibe
The price of aluminum has exploded to multi-year highs and Alcoa shares have followed the uptrend.
Multi-year aluminum summits
At the height of risk-free selling at the start of the global pandemic, all asset prices fell and aluminum was no exception. Aluminum is a non-ferrous metal which is an essential part of the infrastructure. The base metal is also a requirement in the quest to tackle climate change as it is part of many clean energy initiatives. Ironically, the production of aluminum requires an electrolytic process that uses a lot of energy.
The price of the metal has skyrocketed since it hit a three-month low of $ 1,455 per tonne in April 2020.
Source: bar chart
The chart shows that aluminum futures have reached the highest price since July 2008 this month, when they traded at $ 3,229 per tonne, more than double the price at the lowest of ‘April 2020.
Three-month futures peaked on October 18 and returned to the level of $ 2,868 per tonne on Friday October 22.
Inventories tend to go down; production costs increase
Aluminum stocks in LME warehouses have trended in recent months.
Source: LME / Kitco
The graph shows that aluminum in LME warehouses around the world fell from 1.95 million tonnes to 1,086,625 tonnes as of October 22, a drop of 44.3%.
Falling inventory levels are a sign of strong global demand for aluminum.
Ironically, aluminum is an essential metal for the transition to renewable energy sources. Aluminum production requires intensive use of electricity produced by,, and coal. Rising traditional energy prices are putting additional upward pressure on the price of the base metal.
Chinese sales did not stop the rally
In recent months, China has sold base metals and crude oil from strategic stocks to curb price appreciation. From July 2021 to October 2021, the Chinese government sold 570,000 metric tons of copper, aluminum and. , China held its fourth auction which included 70,000 tonnes of aluminum. Selling didn’t stop aluminum futures from hitting a new high at $ 3,229 per tonne this month.
Meanwhile, China is now selling coal at discounted prices to aluminum and other commodity producers, pushing the price down from the new all-time high for the dirtiest fossil fuel.
Alcoa: global producer with an upward trend in profits
Alcoa stock price action, as well as its reflection of rising aluminum prices from 2020 low to October 2021 multi-year high. Producers provide leveraged exposure to the product they extract from the earth’s crust and transform into industrial raw materials. Stocks tend to outperform during rallies in the underlying commodity and underperform when prices fall. Aluminum production is a capital intensive activity. Extraction, smelting and refining involve high costs, but the benefits can be huge.
Source: bar chart
The chart highlights AA’s rise from $ 5.16 per share in late March 2020 to the most recent high of $ 57.57 on October 18. While the price of LME aluminum rose 122%, AA stocks rose more than 11 times. At the $ 51.17 level on October 25, AA pulled back from the recent high, but remained nearly ten times higher than the 2020 low.
Source: Yahoo Finance
The chart above shows the uptrend in AA earnings. The company reported strong third-quarter tax profits on October 14, beating expectations. He was also launching a dividend and share buyback program to strengthen stocks.
The rise of aluminum to the highest level since 2008 is a sign that the company is on the right track to continue to accelerate its growth. A survey of 11 analysts on Investing.com put a target of $ 58.50 for AA stocks, up 14.32%, with forecasts ranging from $ 52.00 to $ 63 per share.
Chart: Investing.com
AA pays shareholders an annual dividend of $ 0.40, resulting in a return of 0.81% on the current share price.
Levels to watch in AA stocks
Rising global inflation, increasing demand for aluminum and the trend in metal prices are supporting higher prices for AA stocks.
Source: bar chart
Above the recent peak of $ 57.57, the technical target for the stock stands at $ 62.35 in April 2018. The all-time peak occurred in July 2007 at $ 109.22 per share.
Alcoa shares have the option of continuing to recover as the stock’s path of least resistance remains elevated at the end of October 2021.