Industrial metals enjoyed a dramatic move up out of 2009 lows, but ever since fears of a second developed-markets recession have emerged they have rolled with stunning speed and force.
Let’s take a quick look today at one of the former leaders, Century Aluminum (CENX), a small producer that was benefiting from rising commodity prices and increased global demand through the spring but has since been tossed away like a wad of tin foil.
CENX competes with large-scale producers like Alcoa (AA) and Rio Tinto (RTP), but differentiates itself as a pure aluminum play rather than as a company that makes finished products or produces any other metal.
Aluminum is the second most-widely produced metal in the world behind iron. Its high strength-to-weight ratio makes it ideal for airplanes, rockets, cars, bridges, buildings and electrical transmission lines, not to mention dinner leftovers. On average, a Boeing 747 uses 66 tons while North American cars are 8.6% aluminum. The non-ferrous metal is corrosion resistant, making it a great choice for cooking utensils, baseball bats, watches, soda cans, foil and protective electronic casings.
As the most-abundant metal in the earth’s crust, aluminum is common in bauxite, a natural compound found mostly in tropical climates such as Ghana, Indonesia, Jamaica and Surinam. Turning this substance into a high-grade aluminum is extraordinarily energy intensive. Since energy is CENX’s highest operating cost, the company operates a global supply chain that brings bauxite from these warm areas to the United States and Iceland where electricity is cheap.
Spun off from Swiss commodities conglomerate Glencore International in 1995, Century started with one plant in Ravenswood, W.Va. Through a series of acquisitions, the company now operates three plants in the United States and one in Iceland. In 2009, the company had 785,000 tons of smelting capacity (or about 15% of Alcoa’s total), and $960 million in annual sales. With its 8% rise on Monday, CENX’s market capitalization reached $1 billion.
Century faces short-term problems due to high production costs and aluminum prices that have fallen 27% in two months. A survey of Bloomberg analysts forecast $2,100 per metric ton, or a 7.1% increase over the current price by the end of the year. Analysts are often too pessimistic. Their 2010 estimates are 28% below the current aluminum spot price.
Oleg Deripaska, chief executive of the world’s leading aluminum producer Rusal, based in Russia, forecasts a potential aluminum shortage. Combined with record global car production predicted by Nissan chief exec Carlos Ghosn, aluminum has a great shot at rebounding.
Harbor Intelligence, a research firm that correctly predicted a 2009 closing price above $2,200, forecasts prices as high as $2,500, which would be 27% higher, before the end of this year. Credit Suisse commodity strategist Andrew Karsh told Bloomberg, “We’ve been having a reactionary market instead of one that is driven by the fundamentals. The fundamentals are still strong.”
China, the world’s biggest aluminum consumer, may be slowing down a touch, but it is still expected to grow 8% annually. Meanwhile, U.S. auto sales rose for an eighth straight month. American manufacturing increased 1.0% month over month in May, beating economists’ expectations and rising for a 10th consecutive month.
News that China will ease its currency peg is bullish for CENX, too, even if it’s a small amount. As commodities are priced in dollars, Chinese consumers will have increased purchasing power, fueling demand for basic durable goods that require aluminum. In May, Chinese authorities increased electricity prices by as much as 100% for heavy users, making smelting in China more expensive– and foreign imports more attractive.
A fairly new aluminum ETF iPath Dow Jones AIG Aluminum (JJU) has also been buying large quantities of aluminum.
CENX is very cyclical as margins are determined by the price of aluminum. In the chart above, you can see that the stock jumped tenfold from the 2009 low to the 2010 highs. CENX then collapsed with the price of aluminum during the recent financial crisis. As the stock fell to $1 in 2009, buyers rushed in and the stock came under heavy accumulation until the start of this year. Bulls tried to recover the January high in the spring, but the stock has since resumed its bearish ways.
One reason: despite 27% revenue growth last quarter, analysts expect single-digit annual increases next due to falling aluminum prices. And unfortunately that’s probably going to be seen as an optimistic view before too long. CENX is now a sell as global demand for metal decelerates.
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