Analysts predict aluminum prices will stay high

Higher energy costs, tighter materials supply and new demand could push aluminum prices up

by Dave Hannon -- Purchasing, 6/4/2008 12:22:00 PM

“Higher energy costs will lead to high prices for aluminum,'' said Eugen Weinberg, a commodity analyst at Germany’s Commerzbank in a recent Bloomberg report, echoing the sentiments of several other market watchers. According to Barclays Capital, energy currently accounts for about 40% of the cost of aluminum smelting, compared with 30% last year, and aluminum supply will expand at a mere 4.5% this year, down from 12% in 2007, according to a May 12 forecast by Citigroup.

Market analysts are closely monitoring aluminum supply. London's Rio Tinto Group, the second-largest producer of aluminum postponed its $2.7 billion smelter project in South Africa after the nation's state-run utility failed to assure power for the plant before 2011. But Rio Tinto may put that money into a plant in Quebec, however, that would increase North American supply.

North American aluminum demand may see an increase after the U.S. Environmental Protection Agencylast week issued a ruling that changed automotive industry environmental rules to encourage “motor vehicle manufacturers to use more aluminum parts, producing vehicles that are lighter. Lighter vehicles are capable of increased gas mileage and decreased exhaust air emissions, including greenhouse gas emissions.”

According to a Forbes.com report, the prior rules drove up the cost of aluminum car components by forcing car makers to implement expensive clean-up systems. “As a result, last week's amendment will substantially reduce the cost of aluminum-based car components, which will likely accelerate the industry's plans to replace vast amounts of steel currently used in cars with aluminum…Congress' recent decision to raise fuel efficiency requirements has intensified the auto industry's interest in lightweight materials. Aluminum could reduce the weight of cars dramatically because it weighs roughly half as much as steel. Every 10% reduction in car weight results in a 6% to 8% decrease in gasoline consumption.”

Higher production costs, increasing demand and possibly tighter supply would combine to push aluminum prices higher, say analysts. Bloomberg’s analyst surveys show aluminum prices will average $2,879/metric ton, $2,875 and $2,659 a ton in 2009 through 2011.