We recently compiled a list of the 13 Best Commodity Stocks To Buy According to Analysts. In this article, we are going to take a look at where Albemarle Corporation (NYSE:ALB) stands against the other commodity stocks.
Two major trends that are shaping commodity markets are the rising interconnection of the market and the increasing importance of power in the energy transition, as per a report. The link between necessary commodities for the energy transition, such as LNG and metals, grew to 56% in 2022-23, up from 27% in 2015-19. With the introduction of more than 100 new tankers in the previous three years, the supply of LNG is rising dramatically. By 2028, it is anticipated that there will be more LNG carriers than oil carriers. Flexible contracts and increased competition between Europe and Asia are the main causes of this change.
Moreover, estimates suggest that power will play a larger part in the energy transition by 2040, contributing between $1.3 trillion and $2.4 trillion, expanding at a rate of up to 5% annually. Since renewable energy is predicted to account for the majority of the power mix between 2030 and 2050, significant investments in transmission networks, flexible power assets, and renewable energy sources will be required to meet net-zero targets. Up to 50% of the steel, copper, and aluminum needed for production will come from wind turbines alone.
Meanwhile, it is becoming more difficult to reduce inflation as global commodity prices level off, according to the World Bank’s April 2024 Commodity Markets Outlook. The price decline from mid-2022 to mid-2023 was 40%, but it has since stabilized. However, since the middle of 2023, indices of commodities prices has largely not altered. The World Bank projects that global commodity prices will fall by 3% in 2024 and 4% in 2025, assuming that geopolitical tensions do not flare up again. Inflation will continue to rise above central bank targets despite this modest decline as per the report World Bank.
Oil prices are still high as the world economy is going down; Brent crude is expected to average $84 a barrel by 2024, as per the World Bank. Prices might rise above $100 in the event of global upheaval, providing investors in oil substantial profits. Secondly, due to geopolitical uncertainty and the robust demand from central banks in developing countries, gold is predicted to reach record highs in 2024. This confirms gold’s reputation as a “safe haven” asset in times of market volatility.
Moreover, the demand for metals like copper and aluminum is being driven by investments in green technologies. Already at a two-year high, copper prices are predicted to grow by 5% in 2024, while aluminum prices are forecasted to rise by 2% due to rising demand for renewable energy infrastructure and electric vehicles.
On the other hand, a report from a large US bank stated that, in May, commodity prices reached all-time highs, driven by increases of 74% in only 1.5 months for U.S. natural gas, copper, gold, and cocoa. A retreat in June was brought on by profit-taking and worries about the U.S. economic slowdown. By year’s end, Natasha Kaneva projects a 10% growth in the commodity market, citing weather-related supply chain disruptions and favorable fundamentals that might raise the price of gas, oil, and agricultural products. Energy transition commodities may see more gains from China’s decarbonization initiatives, and gold prices may reach $2,600/oz by 2025 as a result of Fed rate cuts and central bank easing.
Methodology:
We sifted through holdings of commodity ETFs to form an initial list of 20 commodity stocks. Then we selected the 13 stocks that had the highest upside potential based on analysts’ consensus. We have only included stocks in our list with an upside potential of 30% or higher. The stocks are ranked in ascending order of the upside potential.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A team of scientists in a laboratory observing the sophisticated engineering of specialty chemicals.
Albemarle Corporation (NYSE:ALB)
Upside Potential: 49.45%
Albemarle Corporation (NYSE:ALB) is among the biggest producers of lithium worldwide. Most of the demand for lithium in the industry originates from batteries, which employ lithium as an energy storage material, especially in electric vehicles. It is a manufacturer of lithium, accounting for the majority of its total revenue. Its upstream resources consist of two joint venture hard rock mines in Australia and salt brine deposits in the US and Chile. The firm runs lithium refining facilities in China, Australia, the US, and Chile. When it comes to producing bromine, which is used in flame retardants, Albemarle is a world leader. It also produces a significant amount of catalysts for oil refinement.
Through two joint venture stakes in Australian mines, Talison (Greenbushes) and Wodgina, as well as its own salt brine assets in Chile and the United States, it produces lithium. One of the most affordable sources of lithium in the world is the Chilean operation. Since spodumene can be immediately turned into hydroxide, talison is one of the best spodumene resources in the world, enabling Albemarle to be one of the most affordable producers of lithium hydroxide. The company also possesses a third sizable resource in the form of Wodgina, a high-grade spodumene asset that is more expensive than Talison.
The fall in lithium prices was reflected in Albemarle’s Q2 2024 results, as adjusted EBITDA for the entire firm fell by 70% YoY. In reaction to declining lithium prices, management announced more reductions in capital expenditures and cost-cutting measures. Most significantly, the company announced that it would cease work on phase three of the Kemerton lithium hydroxide processing facility and place phase two under care and maintenance. Additionally, it will further reduce capital investment in 2025 and beyond and lower unit production costs to increase profits in the aftermath of lower lithium prices.
Nonetheless, being one of the most affordable sources of lithium production in the world, Albemarle Corporation (NYSE:ALB)’s brine operations in Chile and spodumene hard-rock activities in Western Australia provide it with superior lithium assets. Hence, the average price objective of $117.18 indicates a possible gain of 49.45% from the current stock price.
Overall ALB ranks 2nd on our list of the best commodity stocks to buy according to analysts. While we acknowledge the potential of ALB as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ALB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.