One of the Biggest Opportunities in Commodities Since 1997

Posted: Jul 22, 2012 12:01 AM

If you want to be successful in the stock market, then sometimes you must think like a contrarian.

I've spent 15 years in the investment industry. In that time, I've seen many investors struggle and many others make a fortune.

The difference between success and failure usually has little to do with intelligence or analytical skills. Rather, the best investors generally have an ability to stay cool under pressure and the fortitude to break away from the herd when necessary.

Keep that in mind with the metal I'm going to tell you about. Since April 2011, prices for this industrial metal have fallen close to 30% -- from $2,667 per ton to under $1,900.

But the recent selloff has made this metal cheap... too cheap. And investors who buy now have the opportunity to make a lot of money if prices rebound.

The metal I'm talking about is aluminum, a substitute for copper.

Back in 1987, and again in 1997, the two metals were close to parity (they cost about the same). But during the past decade, copper prices have quadrupled to $8,800 per ton, while aluminum has remained stuck at $2,000 per ton.

This is the most extreme pricing disparity (and thus most advantageous climate for buyers to switch to aluminum) in the past 15 years.

This divergence can't last forever. Manufacturers aren't stupid. If there are two industrial metals that can perform similar duties, but one is trading at a discount to the other, then which one do you think they're going to chose?

And this isn't just my prediction either... we're already seeing it happening. Right now, aluminum is displacing 400,000 tons of copper usage annually.

With aluminum rapidly replacing more and more copper every year, I believe prices will converge not by copper falling, but by aluminum rising. And there are several other factors at play that point to the exact same conclusion.

Due to falling prices, many aluminum manufacturers are shutting down some key production operations... helping sop up excess supply.

Last October, several Chinese facilities representing 1.7 million tons of annual aluminum smelting were closed. The Henan province went so far as to ban new aluminum projects for the next three years.

Alcoa (NYSE: AA), followed in January with plans to close plants in Texas, Tennessee, Italy and Spain, removing another 530,000 metric tons (12% of the firm's annual capacity) from the market.

This is a large cut from the global aluminum assembly line. Some of these plants are just temporarily idled, but others have been completely decommissioned and won't be coming back. And if prices don't rebound soon, then there will be more.

With prices languishing near $1 per pound, some research outfits believe 30% of the world's smelters are cash negative right now, meaning they are unprofitable. I've seen other sources say 50% of aluminum plants are currently operating in the red. Let's split the difference and say 40%.

That would mean two out of every five aluminum smelters worldwide are currently losing money. Only efficient operations are still turning a profit. You're not going to keep producing something that sells for $1 if it costs $1.15 or $1.25 to make it.

With aluminum below the industry's cost of production, there will likely be more production curtailments going forward. That's particularly true in China, where there is limited bauxite (a key raw ingredient) and many of the country's inefficient, high-cost smelters are being pinched by rising electricity costs.

At the very least, this should mop up some of the excess supply that has kept prices low. Meanwhile, global demand is expected to rise 7% this year to 48 million tons (China will consume about 40% of that).

Much of the metal will go to the usual places, such as beer and soft drink cans. But I'm particularly optimistic about the outlook for global auto and commercial aircraft manufacturing -- both of which are heavy users of aluminum.

Just in Japan, aluminum imports reached 166,000 tons in April, the third consecutive monthly increase, thanks to a 48% jump in sales to car makers. And Boeing (NYSE: BA) and France's Airbus have 2,581 planes scheduled for delivery in 2012 and 2013.

Action to Take --> With plant closures putting a crimp in supplies and buyers demanding a few million extra tons this year, the world could be headed toward an aluminum deficit in the next 12 months. If so, then it would end a six-year surplus -- perhaps marking the turning point from bust to boom.

If you're interested in buying aluminum stocks, I cover the metal extensively in my premium newsletter, Scarcity & Real Wealth. Learn more about what's going on in the aluminum market by clicking here.

-- Nathan Slaughter

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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