Hold on: Prices have not peaked

Staff -- Purchasing, 10/6/2005

Aluminum primary ingot will average 90¢/lb next year and 86¢ in 2007, compared with about 83¢ so far this year, forecasts analyst Daniel Roling at Merrill Lynch & Co. "Aluminum prices have not yet peaked," he says, pointing out that the primary aluminum ingot price on the London Metal Exchange aluminum has been trending upward during the last two years, it has increased less than 30% off the low of 65¢ in 2003.

The New York-based analyst suggests that aluminum inventories monitored by metals exchanges in New York and London will fall by two thirds by the end of next year, reducing supplies to the equivalent of 3.5 days of demand, from 10.2 days in September. Similar supply reductions have helped copper and nickel prices double since 2002.

Demand for steel and such key nonferrous metals as copper and aluminum have jumped lately mostly because economic growth has quickened in China, boosting demand for buildings, cars, trucks and appliances. "But, aluminum prices lagged other metals in rising in price because inventories fell less and have been little changed at 10 days of supply since March," Roling says. He points out that LME aluminum for delivery in three months has gained 40% since the end of 2002 while copper has risen 131% and nickel has more than doubled.

Pittsburgh-based Alcoa is the world's biggest aluminum maker followed by Alcan, based in Montreal. Both companies forecast that inventories will be drawn down in 2005, and Alcoa says the decline will last through 2007. Inventories monitored by the LME have dropped 33% since last summer to 509,350 metric tons, the lowest level in four years.

Global aluminum production so far this year has risen by 9%, mostly because of a 20% surge in Chinese production, according to the International Aluminium Institute. "We've been setting records in aluminum production for years now," Roling says. "The issue is that demand is growing even faster." In fact, over the past nine years, aluminum consumption has grown at a 4.7% annual rate.

But, the future face of aluminum production may have to change because China is curbing aluminum exports that exacerbate the country's electricity shortage, Roling says. Electricity accounts for about a third of the cost of making aluminum. Even rising production of aluminum outside China next year is unlikely to derail the rally in prices because any increases probably will be outpaced by growth in demand, Roling says in his report.