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Macquarie Ups Aluminum Giant Alcoa

Macquarie Research upgraded the world’s largest producer of aluminum today and said it expects the price of the metal to rise over the next several years. It upped Alcoa from “neutral” to “outperform.”

Analyst Curt Woodworth made the call and joined us live on Fast Money to talk about it. He tells us that he has been cautiously bullish on metals, including aluminum, for some time. So what makes him feel well enough about aluminum to upgrade it now?

Well, a lot of it has to do with China.

Aluminum smelting prices have increased and 40% of all aluminum is produced in China, Woodworth explains. Right now, the Chinese government seeks to slow their economy and especially in the property markets where aluminum is used, he says. Chinese demand for the metal has increased by 40% in the past year. Woodworth says much of the Chinese production is “underwater,” so the government will likely cut it.

So as their slowdown continues, less aluminum will be produced and prices will rise.

He also points out that copper, coal and ore prices are trading well above marginal cost production, whereas aluminum is at cash-cost support making the downside risk on the commodity low.



Plus, physical premiums for aluminum in Europe recently reached decade highs. Premiums in the US and Japan are now are their highest levels since 2005, which suggests that the physical market remains very tight, he says.

Woodworth says Alcoa is “extremely undervalued” and raised his price target to $18 from $17. He says the stock price is way below where the selloff would lead you to believe.

Alcoa stock has lost about 21% of its value since the company posted its fifth-straight quarterly loss on April 12.



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