Prices will remain volatile in 2006
Staff -- Purchasing, 6/15/2006 2:00:00 AM
Aluminum prices, lately at 18-year highs, should remain extremely volatile for some time "given the low levels of primary aluminum inventory globally," says the latest Davenport Monthly Aluminum Update, a report written by analyst Lloyd T. O'Carroll at Davenport Equity Research in Richmond, Va.
Even if there isn't a strike against U.S. aluminum major Alcoa this spring, he suggests that investment by commodity funds will continue to inflate London Metal Exchange (LME) aluminum prices, which have risen to a year-to-date average of $1.14/lb through mid-May from an average 85¢/lb in 2005. "We've been writing for several months that we thought the aluminum market was vulnerable to price spikes," O'Carroll writes. "We certainly are seeing that." In daily trading, the LME cash price has posted in excess of $1.35/lb in May, which the Davenport Equity analyst believes is "the upper end of the range that is justified by industry fundamentals."
Aluminum demand appears to be holding up well with new orders for mill products running at 5.3% ahead of levels through April of 2005. Michael F. Gambardella at J.P. Morgan Securities in New York expects seasonal demand for building products and can sheet to improve in the warmer summer months. "Also, recent commentary from the service center inventory seems to indicate that restocking for aluminum products will help to underpin aluminum prices in the second and third quarters," he says.
Looking ahead, automotive demand probably is the one end market where the strength of demand remains questionable "but efforts to increase fuel economy standards should serve as a long-term benefit to aluminum consumption by the auto industry," says Gambardella.
So, aluminum supply fundamentals have moved from tight to extremely tight over the past couple of months, O'Carroll writes, adding that global supply of inventory has decreased from 40 days worth earlier in the year to 36 days in May. (Alcoa is expecting a deficit of 500,000 metric ton in primary aluminum this year.) "This is the tightest we've seen since 1988 when the LME cash price averaged nearly $1.18/lb for the year, with a trading peak of $1.63/lb in June of that year," he says.
In a conference call with analysts, Century Aluminum's president, Logan Kruger, said he sees global aluminum demand growing at a "healthy" 4-6% in 2006 and 2007, but global aluminum capacity is expected to grow only 2-3% over the next few years due to a lack of long-term power contracts at affordable prices and high alumina costs.
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