The price of aluminum ingot on the London Metals Exchange declined 16% through July from late-March peaks, and is expected to average 82¢/lb in the second half of the year, compared with 84¢ in the first six months, according to analysts in London and New York surveyed by the Bloomberg News Service. The big debate is over the trend in 2006, where some analysts see a 7% gain, depending on demand trends in the face of possible supply reductions next year.

Credit Suisse First Boston analyst David Gagliano in New York writes that the early summer price decline could be reversed if energy prices continue to trend higher and aluminum producers tighten supply. Several producers have told the Reuters News Service that climbing energy prices could spur production cutbacks. Analyst Adam Rowley at Macquarie Bank of Australia agrees that could boost the spot LME price of aluminum, the amount paid for immediate delivery, to 90¢/lb—but not until next year. Analyst Daniel Roling at Merrill Lynch also thinks the cash price for the metal may average that high next year if producers follow through on their smelter-cutback plans.

Gagliano has issued a bullish note for long-term investors on the light-metal sector; citing what he believes is an increasingly favorable near-future aluminum North American market. "Recent manufacturing indicators suggest a potential rebound in aluminum demand for the second half of 2005 and into 2006," Gagliano suggests. However, he cites the Institute for Supply Management's new-order index for manufactured goods published in June, which was 57.2, compared with a long-term average of 55. (On this index, anything above 50 indicated growth.)

Conversely, PURCHASING magazine's buying-plans index for firms that manufacture goods was 49.1 in June, compared with a long-term average of 47.5. Also, sales prices for aluminum have softened this summer because of weak near-term demand and fears of an economic slowdown in the second half. Prices of the lightweight metal used in aircraft, packaging and auto parts, defied forecasts by companies such as Standard Bank of London and the Macquarie Bank, which earlier had suggested high market prices for ingot—which had averaged 78¢ on the LME in 2004. That was a 20% gain from 65¢ in 2003 and all caused by falling aluminum supply.

Lately, "Chinese exports have largely constrained the upward price trend in aluminum,'' complains Richard Evans, executive vice president of Alcan, the world's second-biggest aluminum maker, in a recent news report. Analyst Amos Fletcher at Morgan Stanley writes in a recent report: "A combination of lack of demand and high inventories of the metal has weighed down the price of aluminum, making it the least attractive of all metals, including steel, for investors." And that's why he sees second-half pricing staying weak.

Despite the Credit Suisse First Boston analyst's optimism about U.S. and Canadian manufacturing, new orders of aluminum-mill products in North America have been falling steadily since May, according to data from the Aluminum Association. And, with a worsening outlook for Europe, global aluminum demand growth this year is likely to slow to 5.8%, compared with a growth of 9.5% last year, says Standard Bank of London in its July monthly report.

Also, global aluminum inventories, excluding China, already had climbed to a four-year high of 1.87 million metric tons in May, led by increases in Asia and Latin America, according to the International Aluminium Institute. (The London-based group does not collect data in China, but home-government data shows the country continues to export more aluminum than it imports due to rising production.)

World aluminum supply will rise 5% to 31.2 million metric tons this year, according to Societe Generale, one of the 11 "ring dealers" that trade aluminum on the LME. China overtook the U.S. last year as the world's biggest producer, and aluminum output in the Middle Kingdom rose almost 15% in the first five months to 2.8 million metric tons. Exports of the metal jumped 31% to 642,179 metric tons, more than double the nation's imports in the same period, according to government data.

Aluminum uses the most energy to produce, with power accounting for about one-third of production costs. Yet, it is being reported by various Asian news services that Aluminum Corp. of China (Chalco) plans to increase its alumina output by at least 10% annually for the foreseeable future, double its production to 1.5 million metric tons by the end of this year and increase it to as much as 3 million metric tons in the next several years. Conversely, because of high regional costs, Norway's Norsk Hydro, the world's fourth-largest producer, plans to shut two smelters in Europe, cutting its output by 10%. Corus Group of the United Kingdom is leaning toward some smelter cutbacks. Also, Pittsburgh-based Alcoa plans to close some plants because of price declines and rising energy costs. Alcan is reducing operations at plants in Switzerland and Germany and is considering cutbacks at two mills in France. As many as three of its nine European smelters are "endangered by rising energy costs," Alcan says.