Power shortages raise some aluminum price forecasts

UBS says aluminum prices will be $1.45/lb this year

By Dave Hannon -- Purchasing, 3/27/2008 2:25:00 PM

Energy costs and energy availability in several aluminum-producing regions around the world have driven several analysts to increase their aluminum price forecasts for 2008 and 2009.

Reuters reports that UBS now forecasts global aluminum prices for 2008 to be $1.45/lb, up from $1.24/lb, while 2009 aluminum prices will average $1.60/lb, up from the previous aluminum price forecast of $1.30/lb.

Earlier in March, Friedman Billings Ramsey raised its price forecasts for aluminum to $1.27/lb, up from its previous forecast of $1.15, while CitiGroup has its forecast at $1.20/lb.

And RBC analyst H. Fraser Philips says in a recent Associated Press report that aluminum prices are set to rise this year. “With inventories forecast to remain at or below critical levels, the surplus in 2008 should put only modest downward pressure on prices. The large deficits forecast in 2009 and 2010 will push inventories down towards frictional levels, and should drive prices up to new cycle highs."

Most analysts feel aluminum prices will climb due to tighter supply in global markets. As reported last month in Purchasing.com’s Commodities Update blog, “aluminum continues to draw pricing strength from fears of reduced supply owing to power shortages in South Africa and China.”

BHP Billiton recently said after South African power utility Eskom Holdings Ltd. cut power to two aluminum smelters down to less than 90%, BHP would partially shut down its Bayside aluminum smelter in Richards Bay, South Africa, which has annual capacity of 194,000 metric tons.

And a recent report from Barclay’s Capital says aluminum has been hardest hit by critically low power levels in five key regions: South Africa, Brazil, Chile, Indonesia and Thailand. Barclay’s estimates that this year alone, shortages of electricity have caused the loss of nearly 800,000 tons of aluminum production.

“The current high level of aluminum prices does provide an incentive for smelters to maximize production,'' said David Moore, commodity strategist at Commonwealth Bank of Australia, in a recent Bloomberg report. “Aluminum prices might then moderate over the second half of 2008 in response to production growth.”

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