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How Do You Call a Bottom?

John Blank


It has long been my view that calling a turn in the global economy is best done by calling a turn in industrial metals markets.   This week offered me a first hint on that turn. 

As you may or may not know, aluminum prices -- a core industrial metal -- remain near three-year lows.  A respected consensus of 40 metals analysts believes these to be the primary causes:  weak demand conditions and high inventory levels. 

Recent U.S. dollar strength and a big upturn in aluminum stock levels centered at the London Metals Exchange (the LME), the primary global trading center for aluminum, have helped depress the metal. 

Downward price pressure on aluminum intensified in early June, despite reports major smelters – notably Chalco in China – started to reduce production and close down unprofitable plants in scale.

Some observers believe aluminum producers struggle to make money at prices below $2,000 per ton.  On July 17th, aluminum prices were $1,773 per ton, which translates to $0.80 cents per pound.  That’s mighty unprofitable.

Now, here is the surprise consensus forecast!

Aluminum prices, according to this same consensus of 40 firms, mostly based in London, are set to rise from a bottom at $1800 per ton to $2200 per ton by December 2014.   That is a strong +22% upward move.  Their next bullish metals? -- Gold and Copper.  From the same June survey, this consensus forecast sees a price appreciation of less than +5% here. 

Aluminum price weakness has hit a major U.S. based producer hard.  Alcoa, which was once a $30 stock, now trades around $8 a share.  It is a Zacks Rank #4 in the Mining – Non Ferrous Metals industry, currently ranked a dismal #240 out of 259 industries.  Its long-term Zacks Rating is Neutral.  Leading the reasons to sell Alcoa shares is “weak pricing” in nearly all sell-side reports.

Turning to the brighter sides of tough market forces, weak aluminum prices have brought down Alcoa’s cost structure in the past three years.  According to a Zacks covering analyst, Alcoa is divesting underperforming assets through its restructuring program and is aggressively pursuing cost-cutting actions.

In addition, aluminum business segment volumes are very cyclical.  Healthy demand in the aerospace market is expected to drive results moving ahead. However, weakness remains in the commercial building and construction market.

It all sums up to a compelling forward-looking picture.  Alcoa’s annual earnings estimates are for $0.40 a share for 2013, but lift to $0.64 a share in 2014.  That is a +60% improvement going forward.  Its P/E on the forward 2014 estimate is a nice 12.4, a good spot for a value investor when the S&500 index is trading around 15 times forward earnings.

My Real Time Insight weekend question for you?

How Do You Call a Bottom?

Your choices:

  1. I am a first mover.  I look at this forecast for strong consensus aluminum price appreciation and get bullish now.
  2. I will look for industry segment volumes to pick up amid reduced inventories.
  3. I will wait for an upgrade in Alcoa’s Zacks Rank to a #2 or #1.
  4. I want to see the Zacks Industry Rank for Metals-Non Ferrous break into the top one third of all industries.
  5. I want to see a turn in Chinese real GDP.
  6. All I need is to see is a major positive policy catalyst out of Chinese authorities.
  7. I want to see a turn in Europe’s real GDP.
  8. I will look for Alcoa’s stock to break $9 or $10 a share.
  9. Other.

Realize this:  Answers here are much greater than calling a turn in aluminum markets.  Your choice amounts to calling a turn in the global economy.

Read the analyst report on AA

Read the analyst report on FCX

Read the analyst report on KALU

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