Aluminum is the most abundant metal in the ground and one of the cheapest, but actually producing it in usable form requires considerable resource, labor and energy.

First, bauxite must be mined. Caustic soda is then added and the mixture is heated, under pressure, until a powder known as alumina is formed. Finally, the mixture is smelted with huge amounts of electricity run through it to produce usable aluminum. In all, it takes nearly two tons of alumina and more than 13,000 kilowatts of electricity to produce one ton of aluminum.

Despite the intensity of the process, aluminum production is an extremely low margin business thanks to the abundance of the raw materials and the fact that the price of alumina has historically been linked to long-term contracts rather than to the spot price of alumina. Given that unfortunate pricing dynamic, it’s critical that aluminum producers be as low-cost as possible.

Australia-based Alumina Limited (NYSE: AWC) fits that bill. The company owns a 40 percent stake in Alcoa World Alumina and Chemicals (AWAC); Alcoa (NYSE: AA) owns the remainder.

Through its stake in AWAC, Alumina has exposure to eight tier-one bauxite mines and refineries in North and South America, Australia, and Africa. By next year, it will also have a new mine and refinery online in Saudi Arabia.

Thanks to its easy access to high-quality, inexpensive bauxite and the proximity of cheap electricity to its refineries, AWAC’s average cash cost is just $273 per ton of aluminum produced, compared to $166 at the lowest end of the cash cost curve and about $386 at the high end. AWAC’s low production cost ranks it near the bottom of the second quartile of aluminum producers.

So why invest in aluminum producers, especially now?

Given the ubiquity of aluminum, any level of global economic growth translates into growing demand for aluminum. As a result, demand for the alumina—the main component of aluminum—typically grows by a bit more than 5 percent annually, or about 6 million tons or more each year.

China in particular ranks as one of the primary consumers of alumina, with demand growing at an average compound annual rate of about 8 percent.

Thanks to that relatively steady growth in demand, an additional 60 million to 90 million tons of bauxite will need to be produced by 2017, but there isn’t sufficient capacity available right now to meet that demand.

Because of the relatively weak global macroeconomic environment, it is quite likely that a supply shortfall could materialize in the intermediate-term, thanks to the relatively high startup costs, heavy infrastructure needs and the regulatory headwinds for developing new mines and refineries.

The pricing structure of alumina is shifting away from its link to the price of finished aluminum and is becoming more dependent on the spot price of alumina, largely because of the potential supply shortfall and rising cash costs in China due to inefficient use of capital and poor quality bauxite reserves.

In 2011, the price of about 85 percent of AWAC’s alumina production was linked to the price of finished aluminum or some metric other than the spot price of alumina. But about a fifth of those production contracts are expiring each year. Last year, 35 percent of production was linked to spot prices as will 53 percent of this year’s production. Moreover, new contracts are being linked to spot prices.

Bauxite supplies are also expected to tighten next year as Indonesia, one of the world’s largest exporters of bauxite, implements a 20 percent export tax on the mineral beginning in January. That will have a major impact on the Chinese aluminum market, which imports about 80 percent of its bauxite from Indonesia.

Many aluminum refineries are already close to being priced out of the market, which means China will have to find a new supplier. With the bulk of its capacity located in Australia and Brazil, AWAC is well positioned to take up much of that slack.

After rising 9 percent in 2012, alumina prices recently broke through $350 per ton and are continuing to move to the upside.

After posting a $52.5 million loss last year, Alumina Limited should swing back to a profit in 2013, thanks to improved alumina prices and price structure.

Additionally, China is interested in developing a deeper relationship with Alumina Limited, given the announcement this past February that CITIC Group, China’s largest state-owned investment company, purchased a 13 percent stake in the company for $468 million. It’s quite possible that CITIC is contemplating a takeover.

With low costs and growing pricing power thanks to tightening global supplies of key inputs, Alumina Limited rates a buy under 5.