Is the rally in Rio Tinto Limited and South32 Ltd over before it started?

The big dive in the aluminium price overnight could cause some degree of panic among miners who benefitted the most from the stellar surge in the price of the shiny metal.

US President Donald Trump can be credited for the recent rally that took the commodity to multi-year highs and he can again stake credit for the 7% plunge in its price last night to US$2,295 a tonne. Trump personifies the saying that a dog’s bark is worse than his bite!

This leaves investors to question where to next after seeing the share price in our aluminium producers like South32 Ltd (ASX: S32), Alumina Limited (ASX: AWC), and to a lesser degree Rio Tinto Limited (ASX: RIO) take off.

I think the rally in aluminium is over – at least for now. Metal traders dumped the metal after the US said it may ease sanctions against Russian aluminium giant Rusal if Russian tycoon Oleg Deripaska gave up control of the company.

Trump has also given more time for Rusal’s customers to find alternative sources of the material and that’s taken the upward pressure off the price of the metal.

I think aluminium has peaked in the short-term as Rusal has an extra five months to sell off its inventory. Whether aluminium prices stay down will depend on Deripaska.

What is more significant is that Trump has introduced sovereign risk on a global scale. His flip-flopping policy intentions have created a new and unneeded headwind for businesses such as Rio Tinto, which is in the process of unwinding its partnership arrangements with Rusal to comply with the US sanction.

Rio Tinto is now left in limbo as it won’t know whether to push through with plans to cut off Rusal, which will no doubt not be a pain-free exercise.

Rusal owns a 20% stake in Queensland Alumina Limited with Rio Tinto owning the balance. Rio Tinto also has supply and offtake arrangements with Rusal and its entities.

Further, our mining giant is already seeing a negative impact to its bottom line as it had to declare force majeure on some of its customer contracts.

This reminds me of a time when we had a revolving door of Australian prime ministers. Businesses refused to invest due to policy uncertainty. This time is worse because of the scale and reach of the US president.

The US has imposed a Trump Tax on the global economy and he’s not done yet!

But there is a sector that is unlikely to be impacted much by the policy fog-of-war. The experts at the Motley Fool are particularly bullish about the outlook for this niche group of stocks as they believe they will have a big impact on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).

Click on the link below to get your free report on this sector and to find out what stocks to put on your watchlist for 2018.

The Richest Man Alive Invests in This

The richest man in the world has just launched a $100 million investment fund and investors who don't take note could miss out on a massive opportunity.

And it isn't by sheer luck. He did it by looking to the future and investing in the big ideas of tomorrow.

This could be your chance to get in on the ground floor!

Click here to discover more!

Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. and South32 Ltd. 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 Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.