For Alcoa (NYSE:), the largest producer in the US, the past year has brought excellent gains. Demand for the commodity has been so strong that buyers from Asia to Europe line up for shipments, using it in the manufacturing of everything from beverage cans to airplanes and construction.
Demand for aluminum has nearly doubled over the past 18 months in a rally that’s totally changed the demand-supply equation for a long-struggling industry. With demand booming and production under pressure in top supplier China, buyers have no choice but to accept higher prices as the global economy reopens after year-long lockdowns.
For the Pittsburgh-based Alcoa, this sudden shift in demand pattern has been great. The company in July reported that beat analysts’ expectations. The company expects 2021 aluminum shipments of 2.9 million to 3 million tons, up from its earlier forecast of as much as 2.8 million.
Goldman Sachs in a recent note said it sees a multi-year bull market driven by aluminum’s central role in the transition to low-carbon energy sources. President Joe Biden’s infrastructure deal has also buoyed the outlook for US demand. Alcoa also said it expects continuing inflationary pressure on raw materials and energy.
But these bullish forecasts are already baked into the Alcoa stock price and a big question for investors is whether they have already missed the boat. Alcoa stock has lost more than 2% in the past weeks amid concerns that markets are in a dangerous territory and a big correction is just round the corner.
A plunge of more than 20% in US stocks is looking more like, a note from Morgan Stanley warned on Monday. The note said evidence is starting to point to weaker growth and falling consumer confidence, an outcome that will see the economy sharply decelerates and earnings get squeezed.
A Highly Cyclical Stock
Alcoa, being a highly cyclical stock, will certainly get hurt if these predictions prove true, after producing a remarkable rally since May 2020. With a beta of 2.7, Alcoa is a highly risky stock during this time of correction and should be avoided when markets enter a bearish spell. A beta bigger than 1 suggests that the stock is more volatile than the broader market, and a beta less than 1 indicates a stock with lower volatility.
But any correction at this stage, in our view, is a buying opportunity as there are many factors that could keep both aluminum prices and demand elevated.
North America’s largest aluminum conference, which ended Friday, also sent a similar message where producers, consumers, traders and shippers said supply-chain snags are unlikely to ease soon.
Bloomberg reported from the conference:
“Snarled supplies will continue to dog the industry through most of 2022, many conference participants said, with some projecting it could take as long as five years to resolve the issues.”
Aloca’s current price, in our view, reflects the gains from a highly favorable demand-supply scenario for the aluminum giant. However, a correction in the magnitude of 15-20% will make this name attractive once again given the bullish outlook for aluminum in the next five years.