The news: Aluminum Corporation of China (Chalco) said late last week that it would cut its aluminum oxide output by roughly 15% because of Indonesian restrictions on bauxite necessary for production.
The significance: The global aluminum industry has not been faring well recently due to massive overcapacity holding down prices. Despite this, Chalco's stock had been surprisingly resilient year-to-date. Then, Indonesia announced last month that it would place an export tariff on bauxite, which is needed to produce aluminum oxide, and would further institute restrictions cutting off bauxite exports entirely by 2014. Chalco, which gets 20% of its bauxite from Indonesia, will cut 1.7 million metric tons of its aluminum oxide output this year as a result. Without that production, Chalco is unlikely to eke out the small profit that analysts had expected this year, and the company may therefore be worth shorting.
The takeaway: Investors should consider selling or shorting Aluminum Corporation of China (Chalco; ACH.NYSE, 2600.HKG) based on cuts to aluminum oxide production that will lower the company's profitability.