Decreased supply coupled with lower energy costs make these aluminum stocks screaming buys.

Aluminum stocks are the cheapest they have been in some time, as oil and natural gas prices fall and supply tightens. Since energy accounts for as much as half the cost of making aluminum, the recent $30 drop in crude oil and $4-to-$5 drop in natural gas are extremely bullish for aluminum producers.

On Stockpickr.com, we created the Aluminum Stocks portfolio, which looks at some of the cheapest aluminum stocks.

Supply for aluminum is down substantially, despite increasing global demand. As Brett Foley just wrote in his Bloomberg piece on aluminum: "Rio Tinto Group, the world's second-largest aluminum producer, said July 22 that the $3 billion, 700,000-ton-a-year project in Abu Dhabi was 'dead' because the United Arab Emirates decided not to use its gas supplies to generate power for smelters. In February, Manama-based Aluminium Corp. of Bahrain said it shelved a plan to increase capacity by 39 percent to 1.2 million tons because of insufficient gas supplies."

Rio Tinto Group (RTP) trades with a forward P/E of 9.36 and EV/EBITDA of 14.888

Other curbs are compounding the supply problem. China's top 20 smelters, with a combined capacity of 16 million tons, agreed in July to cut 10% of output to ease a power shortage and ensure supplies for the Beijing Olympics. Most notable is Aluminum Corp. of China(ACH), which trades with a forward P/E of 6.4 and EV/EBITDA of 1.9.

Also keep an eye on Century Aluminum (CENX), which trades with a forward P/E of 7.7 and EV/EBITDA of 5.0. Its shares have corrected by more than 30% since mid-May, creating a great buying opportunity.

Century Aluminum has recently increased its leverage to the commodity by unwinding forward sales contracts. For every $100 per-metric-ton change in the price of aluminum, Century's EBITDA changes by $55 million vs. about $35 million when the forward sales contracts were in place.

Dahlman Rose recently wrote that Century "shares offer a compelling risk/reward scenario based on our $72 price target. As a result of the financial-restructuring initiatives, Century now has approximately $1.7 billion in tax credits, which we believe have a present value of approximately $7 per share.

"When applying an enterprise value/EBITDA multiple of 6.5 times to our 2009 estimates and incorporating the value of the net operating losses, this translates to a price target of $72, offering almost 35% upside from the current levels.

"Furthermore, we also struggle to envision a scenario where the shares decline by more than 15%, creating a very attractive risk/reward scenario"

Other stocks making the Aluminum Stocks portfolio are Alcoa (AA), which trades with a forward P/E of 9.2 and EV/EBITDA of 8.2, and Kaiser Aluminum (KALU), which trades with a forward P/E of 8.5 and EV/EBITDA of 4.5.

Posted on Aug. 21