Aluminum prices will increase to $2/lb as China slashes output
By Tom Stundza -- Purchasing, 8/14/2008 2:00:00 AM
World aluminum prices could advance by as much as 50% more through 2009 now that China's top 20 aluminum producers are cutting output by 10% to save energy and help that country cope with power outages. Monthly sales prices of aluminum on the London Metal Exchange (LME) already have increased by 39% so far this year due to earlier supply disruptions caused by power problems in China and South Africa.
The bad news for buyers comes from Patricia Mohr, vice president of economics at Scotiabank Group in Toronto, who says "world aluminum supply/demand fundamentals will remain quite tight and will support high ingot prices" in coming months. She estimates that global demand growth for aluminum will be about 8% in 2008–2009, mostly because China now is expected to return to net importer status through 2009 even as it has boosted capacity to about 15 million metric tons/year.
Gayle Berry, a London-based commodities analyst at Barclays Capital Research, expects world aluminum prices to move off the midyear average of $1.29/lb, reaching $1.66 in the third quarter and $1.82 in the fourth quarter. Alan Heap, Citigroup's Sydney-based managing director of global commodities, recently raised his 2009 aluminum price forecast to $2/lb, citing risks from power shortages and rising electricity prices. And that's all because China is cutting production in the face of power shortages.
Electricity accounts for about one-third of the cost of production, making aluminum the metal most vulnerable to the global energy-price crunch. In July, Aluminum Corp of China, the largest producer, and its peers—which together produce more than 70% of China's aluminum—signed an accord to reduce second-half 2008 production by 400,000 tons. The cut is expected to save 5.8 billion kilowatt-hours of electricity this year and double that if the reductions continue through 2009, according to the China Nonferrous Metals Industry Association.
On the surface, the aluminum market is very well supplied with more than 1 million tons of stocks in LME warehouses. But, the Dow Jones News Service reports that the escalating price of oil and record prices for coal that could force high-cost smelters to shut and a string of production disruptions in South Africa, New Zealand and China are overshadowing the market's production surplus, which Macquarie Bank had pegged at 800,000 metric tons at midyear.
That supply overhang could erode fast should China's power problems prove protracted, and even more so if new capacity stays offline. "Chinese capacity growth accounts for the lion's share of world capacity growth over the next four years. With Chinese power supply likely to be problematic, a portion of the Chinese expansion must come under question, just as they have in South Africa in recent months," says BNP Paribas analyst David Thurtell in a note to clients.
Since January, China has initiated a series of moves to curb production by its aluminum industry to curb energy use ahead of the Beijing Olympics this summer. That's because Chinese aluminum production costs have risen 72% over the last five years, according to Barclays Capital Research. Alumina, which is processed bauxite, is the key raw material for aluminum and costs have risen substantially in price. But, so also have energy costs, which drive up ingot prices because aluminum production consumes 15 megawatts of power for each metric ton produced.
Some regions in China will see blackouts this summer, China's State Electricity Regulatory Commission tells the China Daily newspaper. The gap between power supply and demand would be 16 gigawatts during the summer, according to the commission. So, aluminum and energy market watchers say it's also important to see how China handles the situation.
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