It is a Perfect Time to Invest in Alcoa for Long Term Growth
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It is no secret that Alcoa (NYSE: AA) has struggled with the huge steady drop in Aluminum prices. It has been more than a year now that the global economy slump has hurt aluminum sales and sent the stock spiraling earthward from a high of 18 in early 2011 to about 8.54 at the writing of this article. But there are certain elements in play right now that will send the stock skyward again and now is a good time to think about investing in the stock long term.
First Reason: Alcoa is Cutting Production
Alcoa sees the writing on the wall and knows what it has to do in order to bring the aluminum prices back up to acceptable levels. Its economics 101 when the supply exceeds demand, prices are bound to fall. So how does one bring prices back up? Cut the supply source until things even out. This is the first step and since Alcoa has such a huge influence on pricing, it will not take long for things to balance out and turn around.
One cannot produce more than is needed; prices will come down as production slows. So as Alcoa continues to travel through this rough patch, its profitability takes a beating because of the falling aluminum prices, it is going to play a key role in addressing the oversupply of the commodity. It will be the key player in bringing prices back to previous levels as it continues to cut capacity. In April, it announced plans to cut refining capacity on the heels of closing or curtailing smelting capacity that was announced in January. This trend of capacity cuts is expected to continue in the near future until the aluminum prices recover. The revival of alumina prices will be critical for Alcoa as it derives nearly 25% value from the Alumina segment.
The Aluminum Corp of China (NYSE: ACH) will also benefit from this as it has seen its value drop almost 33% since the first of March because of falling aluminum prices.
Increased Usage in the Automotive Industry
The automotive industry has been looking for new materials that can replace steel to increase fuel efficiency of the vehicles. Aluminum fits the deal quite nicely as it is a lighter metal and has comparable strength to steel. Aluminum has been largely able to conquer the drive train and heat exchanger areas, the chassis, body and equipment must be regarded as development areas for lightweight construction using aluminum. Part-by-part substitution of aluminum for steel, although providing the light weight and better corrosion resistance of aluminum, is not the optimal solution. Because cars are still essentially made of steel, a complete redesign of the automobile is necessary to make optimal use of aluminum.
Between the cutting back on production and the increased interest in the automotive industry, it will not take long for aluminum prices to balance out with supply and we will see a nice increase in price and Alcoa’s revenue pick up. This is a good time to enter the stock for along term growth investment.
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