Thursday, April 14, 2011

Alcoa (AA) Would Benefit from Chinese Suspension of New Smelters

An article in the Shanghai Daily, citing the China Nonferrous Metals Industry Association, asserts the Chinese government may take action to halt the overcapacity in the aluminum industry by no longer approving of new smelters, a move that could help alumina giant Alcoa (NYSE:AA).

The report said China produced a little under 18 million tons of aluminum last year, which would represent approximately 85 percent of total capacity. Conflicting reports place the number close to about 60 percent. Whatever percentage is more accurate, it does represent overcapacity.

If smelters are no longer approved in China at this time, it would strengthen spot aluminum prices because of lower production in a annual market growth of 15 to 20 percent. That would boost margins and earnings assuming input costs don't rise too much.

Alcoa closed Wednesday at $16.55, falling $0.15, or 0.90 percent.

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