Hi,
Not an investment recommendation or advice, just some conversation. I am a Macro geek but not so much a stock picker..
Aluminium market is in structurally in deficit as demand has been above production. It already was the case in 2021 and is expected to be the case in 2022, 23, 24, 25 and going forward. In addition, LME stocks are at the lowest level since 2000...
Recession is coming, according to most experts. I don't challenge the rational, but it seems to be quite priced in commodity markets and economy is not a science (in other terms, there is no determinism like in physics and they could be 'very' wrong).
Aluminium production is energy intensive: it is estimated (by legitimate banks) that the median cost of production lies at $2,300. Current price is $2,500. The 50% median cost has historically acted as a support to the Al price.
The median cost is that high because of the energy cost (Aluminium smelting is extremely energy intensive), and I expect (personal view) energy costs to remain elevated in Europe. At current prices, a large part of the production (already in deficit) is at made at a loss. In consequence, more production will be curtailed, and the deficit should worsen. In Europe, electricity prices went up 10-20 fold! (Realize that...) Even Alcoa has some plants producing at a loss, there is no interest for them to feed the market with more supply at a loss, generating a local loss and lower prices globally.
CONCLUSION:
Supply-Demand rebalance should lead to higher prices. European smelters should be the first to cut production leading to higher prices. American smelters should benefit from higher prices, relative lower costs: Higher margins.
CAVEAT
There are large regional premiums that bump the price (+$600 in the US, +$550 in Europe). It could also be seen as physical market tightness.
TANGIBLE MARKET IDEA FOR DISCUSSION Just in case the Market has its pricing correct (recession), I prefer to play it in equities, either outright or medium/LT out the money calls.
Century Aluminium (CENX) is an American Smelter. Despite high energy costs, it should do better than its European peers. It is currently trading at $10, after a recent low of $7. In Q2, volume disappointed but it generates solid net income after several years of loss. To be clear, the company was in bad situation, but if the market behaves (my thesis above) the stock would move from a "distressed sort of company valuation" to a cash maker value stock.
HONNEST ACKOWLEDGMENTS: I am more of a Macro guy and less of a Stock expert. I am seeking advice here as CENX shut down one location in the US due to high Energy costs (still, it has recently generated profits as a company and is compatible with all the above). But: 1) why have they shut down a US plant before the numerous cash burners in Europe? (Maybe hedging makes some Euro company still profitable, but this would be temporary)
2) Do you see another company in a better position to benefit from this environment?
I accept severe comment, best to all of you
Submitted August 12, 2022 at 01:33AM by SheepherderLow6145 https://ift.tt/YvAb3DK
