Alcoa Inc (AA), Vale SA (ADR) (VALE): Industrial Metal Prices Will Go Up Eventually

Metal prices will go up. I do not know when, but I am fairly certain that when global manufacturing of all varieties picks up, there will be upward pressure on the price of industrial metals. That is good news for a company that is poised to benefit from such a rise.

Aluminum has lagged considerably

For me, that company is Alcoa Inc (NYSE:AA). Despite the trying price environment that seems to disappoint at every turn, the company has kept its head above water. It has cut expenses in order to stay profitable. If it can do that in a horrible pricing environment, then I wonder what it can do as the price of aluminum increases.

Learning to run lean is an amazing talent, and it is very quickly forgotten when times are good and the company grows fat. However, commodity prices, like everything else, seem to move in far less time than they used to. Whereas trends would unfold over months, you can see the same movement in weeks. The trend might still continue for months, but big movements can happen in a short time before they even out.

Due to the company’s ability to squeeze out a profit in a tough environment, I expect the first quarter or two to be really great as prices rise. It could be longer, but I am speculating enough without covering a very long time period. I am using common sense and logic to arrive at this conclusion, which is a serious risk when it comes to the stock market.

Alcoa Inc (NYSE:AA) recently reported earnings, and barring special items, the company made $0.11 a share for 1Q2013. If you include special items, it actually increases to $0.13. Despite the solid earnings, the outlook is not great because the sword of aluminum prices hangs over the head of Alcoa. I still think that the patient investor has a lot to gain from Alcoa. If it sweetens the deal, Alcoa Inc (NYSE:AA) is trading below book value.

Consider diversifying your exposure to industrial metals. Whether that means putting more money in them or dividing up whatever you decide to allocate, diversity is the best way to avoid too much exposure to any one metal.

Diversity of industrial and precious metals

For the sake of efficiency, consider Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), which is in copper and gold. Those two metals are often found together, so it is not surprising that Freeport is in both. Copper, as an industrial metal, seems to be more resilient than aluminum. There are a few reasons for this. Aluminum is extremely prevalent, while demand is high but reasonable. As common as copper is, the demand is out of control.

Demand for copper is outstripping the ability to extract it at an affordable price. You might see this as peak copper, but really it is not about running out of copper so much as it becoming prohibitively expensive or technologically difficult to extract enough to meet growing demand.