What happened to these share prices?
Shares of South32 Ltd [ASX:S32] and Alumina Ltd [ASX:AWC] each soared by more than 9% today as rumours circulated that China may impose local bans on steel and aluminium production.
Why did S32 and AWC shares shoot up?
As investment information service, Barron’s noted yesterday:
‘Earlier this week, to control pollution in northern China, Beijing released a new draft proposing to cut 30% aluminium capacity and 50% alumina capacity in “Beijing, Tianjin, Hebei, and surrounding areas”.’
The report notes that the production cut wouldn’t likely occur until November this year. However, markets tend to react today to what they believe could happen tomorrow or in the near future.
That’s why Aussie steel and aluminium stocks have taken off today.
This wouldn’t be the first time that China has had to impose restrictions on heavy industry in order to reduce pollution. During the 2008 Olympic Games, the Chinese government enforced a shut-down on production plants, to cut what had been dangerously high pollution levels.
Why should this affect Aussie steel and aluminium producers? Because if China’s local manufacturers can’t source steel and aluminium in China, they’ll have to import it from overseas. That opens up a great potential opportunity for the likes of South32 and Alumina.
Not to mention other non-Australian steel and aluminium producers, such as US giant, Alcoa Corp [NYSE:AA].
Should you buy South32 Ltd or Alumina Ltd?
It’s probably fair to say that new investors may have now missed out on the opportunity to profit from this potential move by China. With stocks gaining nearly 10% in one trading session, it takes a brave investor to jump onboard a rapidly rising stock.
Furthermore, according to Barron’s, the restriction won’t come into place until November this year. That’s still a long time away, and anything could happen to the markets, economy, and the steel and aluminium sector between now and then.
By Kris Sayce