Prudential out on aluminum market, noting that four separate accidents killed 85 Chinese coal mine workers November 25-27, and 3,726 died in 2,300 separate reported coal mine incidents in the first ten months of this year. Government officials vowed publicly to enforce safety regulations and punish lax or corrupt local officials.
Firm estimates that almost 90% of the coal output generates electricity and the remainder supplies steelmaking. Electricity shortages or reallocation may occur if coal output slows, and Chinese economic growth could slow. Chinese power rates and world coal prices would rise if China uses more imported coal after shutting some of its own mines.
Strict coal mine safety enforcement could cause recent 20% Chinese aluminum output growth rate to slow or even reverse. In 2006 China's 1.5 mmt output gain supplied most of the world's 2.25-2.50 mmt global aluminum consumption gain.
A plausible scenario would be for world metals consumption to fall 1%-2% short of expectations in 2007, spot coal prices to rise an extra $5-$10 per ton, and aluminum supply to fall 2.5% short causing an extra $0.25 per pound rise in aluminum prices.
Notablecalls: While Pru goes on to discuss the impact of aluminium price hike on Alcoa (NYSE:AA), I'd rather keep an eye on Century Aluminium (NASDAQ:CENX). In addition to being more volatile stock, the co is more leveraged to aluminium prices. Note that Merrill is out with an initiation of CENX with Neutral rating, saying that for every one cent change in the price of aluminium, CENX' EPS changes $0.15/sh. $0.25 price change would then account for $3.75/sh addition to EPS. Might consider it as a swing trade.