by winston » Sat Oct 05, 2013 9:07 am
Why one essential commodity was "left behind" by the great 10-year bull market by Matt Badiali
An unusual thing happened over the past decade... one of the most common metals didn’t go up in price.
Most metal prices soared over the last decade. The price of gold rose 375%, from around $400 per ounce to peak around $1,900 per ounce. The price of silver, copper, lead, zinc, platinum, palladium and nickel all soared over that period too.
However, there is one metal that sat out the bull market. In fact, at $2,000 per ton, it’s the same price that it was back in the 1980’s. That metal is aluminum.
Aluminum is the second most used metal after iron. It’s consumed in enormous quantities to make everything from soda cans to car bodies. The problem is supply, because there is a lot of aluminum out there.
About 8.2% of the world’s crust is aluminum. It’s the most common element in the world. The problem is, it is the elemental world’s hook-up king. It is never alone. It’s always bonded to oxygen or potassium and sulphur.
To get the aluminum to separate takes a lot of energy. So much energy, that aluminum giants Alcoa, Rio Tinto, and Century Aluminum all built smelters in Iceland. Iceland has volcanoes, which produce lots of heat. The companies can tap the heat to make steam and generate cheap electricity.
So the companies ship aluminum ore – called bauxite - from the mine to Iceland. Then they ship the finished aluminum ingots to consumers.
As you would expect, with lots of supply and high costs, aluminum producers are struggling to make money. One of the world’s largest producers, Russian giant Rusal, is in real trouble.
It costs Rusal $1,970 per ton to produce, but in the second quarter of 2013, the company could only sell it for $1,886 per ton. That’s a loss of nearly $90 per ton. As my good friend Rick Rule would say, the company is trying to make up its loss on volume.
U.S. companies are facing similar trouble. For example, Century Aluminum sold $1.27 billion in aluminum in 2012. It cost the company $1.22 billion to do it. In other words, the company’s operating margin (that’s before it paid its taxes, electric bill, rent, etc...) was less than 4%. That’s terrible.
Credit rating agency Moody’s recently downgraded giant aluminum producer Alcoa’s bonds from investment grade to junk grade. They pointed to the poor price forecast for aluminum as the reason. Alcoa isn’t some tiny stuggling miner. This is the iconic company that leads the aluminum industry...and its shares are back where they started 20 years ago. You can see what I mean in this chart:
As you can see here, the market hates aluminum, but the world doesn't. This is an incredibly valuable commodity.
As longtime readers know, this is the best kind of market to look for value. Commodity prices cycle, high...then low...and then high again. When Moody's dumps the credit rating of a giant, blue-chip producer, I get interested in the sector.
Source: S&A Resource Report
It's all about "how much you made when you were right" & "how little you lost when you were wrong"