Alumina Limited (ASX: AWC) has seen its share price rise 17% so far this year to $1.34, on the back of rising aluminium prices.

Alumina share price Mar 2016

Source: Yahoo Finance

 

Alumina doesn’t actually produce any aluminium at all – it only holds 40% of Alcoa World Alumina & Chemicals (AWAC) – the world’s largest alumina business (alumina is the key ingredient for aluminium). Alcoa Inc GDR (ASX: AAI) owns the remaining 60% of AWAC and is the manager.

Since mid-January, aluminium is the second-best performing commodity behind zinc, rising 8%, but more gains appear to be unlikely.

Both JP Morgan and Goldman Sachs are forecasting aluminium prices to fall. Goldman Sachs expects both copper and aluminium prices to slide as much as 20% over the next 12 months. JP Morgan says global supply increased by 9% in 2015 – compared to 4% growth in demand.

China’s aluminium smelters reduced their capacity by closer to 15% in 2015 according to Econotimes.com, but production is expected to sharply increase from this month despite weak domestic demand, leading to increased exports of aluminium, and putting more downward pressure on prices.

Foolish takeaway

Like other resources companies, Alumina is almost totally dependent on commodities prices. With aluminium prices under pressure, Alumina’s share price is likely to follow.

Foolish investors might want to steer clear, despite the 6.7% fully franked dividend (Alumina only started paying dividends last year – and they could fall or be cancelled at any time).

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.