As we noted previously in this series, Alcoa (AA) and other aluminum producers—including Century Aluminum (CENX)—are having a terrible year as aluminum prices have plunged. Diversified miners including Rio Tinto (RIO) and Vale (VALE), which were reasonably strong for most of the year, have also come under pressure. In this part of our series, we’ll see how Alcoa looks placed for 2019.
With the recent fall in aluminum prices, several Chinese smelters are losing money. The situation has been especially alarming for companies that don’t have captive alumina refineries. Last week, Chinese aluminum smelters held a meeting to discuss the current state of the aluminum market. The previous meeting took place in 2015, after which Chinese smellers decided to cut production. Any production cuts in China should help lift aluminum market sentiment. Positive progress in US–China trade talks could be another positive trigger for commodity prices, aluminum being no exception.
We could also see some stimulus from the Chinese government to lift the country’s sagging growth rates. China has already indicated that it would step in with monetary and fiscal policy measures to support its economy. From a valuation perspective, although the forward earnings estimate still looks inflated, Alcoa has now almost fallen to the levels we saw in November 2016, when the stock was listed as a separate entity. Back then, aluminum prices were in the ballpark of $1,700 per metric ton. Alumina prices (AWC) were also much lower than currently. While the metal and mining space in general has fallen out of favor with markets, Alcoa could be a contrarian bet for 2019.
In the next part of this series, we’ll see how steel stocks have performed this year with the Section 232 tariffs.