While some Chinese equities like Baidu (BIDU, quote) have outperformed the general market over the past few years, long-term investors in Chalco have seen less impressive returns. Pressured by lower aluminum prices and a secular change in Chinese aluminum demand, Chalco shares have lost more than 80% of their value over the past five years.
Although returns in the equity have been disappointing over the past few years, signs of a potential bottom are starting to manifest themselves. As a result of a combination of factors, the Chinese government appears to be buying large quantities of aluminum.
Chinese concerns over the economic uncertainty in the United States regarding the impending fiscal cliff have driven the Chinese government to seek alternative assets to park money. Embracing materials as one such store of value, the Chinese have begun to buy aluminum to stockpile. While highly unlikely, a major inflationary currency crisis in the American dollar in theory would drive the price of goods like aluminum in RMB terms substantially higher. With its large infrastructure plans over the next ten years, access to crucial building materials is imperative.
As a result of the news that China has begun stockpiling aluminum, stocks with exposure to the sector jumped in Asian trading with the abovementioned Chalco popping more than 5% Wednesday. After sub-par trading this year — Chalco is down roughly 1% for the year while the overall Hang Seng Index is up 16% — today’s move could represent a shift by traders into stocks related to the infrastructure trade. In light of the stated initiatives by the Chinese government going forward in terms of infrastructure build out, emerging market investors could consider enhancing their exposure to this sector.