Will Political Meddling Cut Aluminum’s Staggering Performance Short?

Matthew Carr By Matthew Carr
Emerging Trends Strategist, The Oxford Club

Metals

Time moves differently for investors…

Nearly 10 years ago, we saw the first signs of the Great Recession.

If you had a newborn when the dot-com bubble burst, you’re probably taking him or her on college visits now.

But for investors, the start of the Great Recession seems like yesterday… partly because it’s talked about almost daily.

I always advise investors to be careful with that view… The world is vastly different from what it was just a handful of years ago.

More important, the underlying workings of markets have changed dramatically too.

For example, one-third of the 30 constituent equities of the Dow Jones Industrial Average have changed since the start of 2008.

Then, a little more than four years ago – on September 23, 2013 – the Dow Jones Industrial Average underwent one of its biggest makeovers in a decade.

Buttoned-down favorites Alcoa (NYSE: AA), Bank of America (NYSE: BAC) and Hewlett-Packard (NYSE: HPQ) got booted from the blue chip index.

In their place, the Dow welcomed Goldman Sachs (NYSE: GS), Nike (NYSE: NKE) and Visa (NYSE: V).

That year was a dark time for Alcoa, the world’s fifth-largest producer of aluminum. Shares were trading just above $18 – a sobering 81% decline from the near $100 peak during the glory days of 2007 and early 2008… before the financial world was brought to its knees.

In the wake of the destruction of the financial crisis, Alcoa – and the entire aluminum sector for that matter – couldn’t find its feet. It fell out of favor. Ultimately, Alcoa was cast aside as a relic of better days.

Once Alcoa was tossed from the Dow, ordinary investors stopped giving any thought to aluminum. And despite a rally in 2014, shares of Alcoa tumbled to a low of $14.75 in January 2016.

But we all know how quickly fortunes can change

In September, shares of Alcoa hit $47.95. Not only is that a 225% gain from those January 2016 lows, but it’s the highest price Alcoa shares have traded at since 2008.

But before you start to think this all just a setup for the next collapse, here’s the reality: Aluminum is on a tear…

Aluminum is beating the Dow, the S&P 500… and even the tech stocks on the Nasdaq. It has left all other metals, except palladium, in the dust.

It’s incredible to consider that aluminum started 2017 a few cents above $1,680 per metric ton. Today, it’s 26.5% higher, trading at more than $2,125…

We have our friends in China to thank for that.

The Global Impact of China’s Illegal Aluminum Crackdown

You may remember that I covered this year’s aluminum surge back in August.

Essentially, China got around to cracking down on illegal aluminum-producing plants. The government shuttered 2 million metric tons of illegal production.

But there’s still a long way to go.

In fact, there could be as many as 6 million metric tons of illegal production in China. And as many as 6 million metric tons have come offline.

As I noted last month, there could be a lot more room for the metal to run if China continues its crackdown.

China’s aluminum production has already fallen to its lowest level since April 2016.

But there’s another battle that could cool off aluminum’s scorching price – the one the Chinese government is in against dangerous levels of pollution.

In September, China announced its plan to join a number of European countries in banning the sale of internal combustion engine vehicles.

As Energy and Infrastructure Strategist David Fessler pointed out, China produced 28 million vehicles last year and is the largest automotive market in the world.

In the near term – and I mean starting this month – China is ramping up its battle against pollution.

That’s because during the winter months, China’s air pollution spikes…

Last December, for example, 20,000 people were stranded at Chengdu Shuangliu International Airport because of heavy smog.

The Beijing Air Quality Index in Chengdu soared to 280, while the numbers in cities surrounding Beijing spiked as high as 875.

What Comes After “Political Blue” Skies?

China is notorious for what we’ll refer to as “political blue” skies.

The government shuts down factories and bans cars to curb pollution before major political events… but once the events are over, everything ramps up to account for lost time.

The 19th annual congress for the Communist Party will meet in Beijing later this month. In turn, China will implement production cuts across several sectors, in addition to increasing safety and environmental oversight. The cuts will last until March 2018.

We don’t know for sure what will happen in March. If history is any guide, production will ramp up even higher than before…

So the long-term impacts are still hazy… at least for now. But short-term moves are already being made.

We’ve seen aluminum shares post eye-catching gains already…

Century Aluminum (Nasdaq: CENX) is up more than 100% in 2017, which is well ahead of the 70% gain that Alcoa shares have made. The move year to date in Century Aluminum is four times that of both Rio Tinto (NYSE: RIO) and the iPath Pure Beta Aluminum ETN (NYSE: FOIL).

They’ve all gained since I wrote about them in August. Alcoa is up 18.5%, and Century Aluminum is up 14.5% since then.

For two months, China’s aluminum production has dropped. It’s far and away the largest producer in the world, accounting for almost 60% of global production.

The moves China has made to get rid of illegal production are a great step and have driven prices higher.

For now, “political blue” skies are just theater. In the short term at least, aluminum’s run is set to continue.

Good investing,

Matthew