Could aluminum prices rise in the face of a recession?
Citing opinions from some 25 metal market analysts, Harbor Intelligence is predicting a better than 50% chance that the aluminum price will rise in 2008, hitting a peak of over $2600/mt in 2008 and over $2700/mt in 2009. At the same time that Morgan Stanley is predicting a full blown U.S. recession next year, the Harbor report cites four price support pillars that will see aluminum price increases next year.
Higher costs for Bauxite, energy, and freight will severely limit the planned growth of output which has been expected to meet growing demand in the developing BRIC economies (Brazil, Russia, India, and China). In the same report, Macquarie Bank is reporting that some smelters around the globe are experiencing costs of around US $2500/mt (above today’s LME levels) due to this combination of high input costs.
Some 70% of the growth in aluminum production came from China over the last three years, but this too is set to change due to a combination of higher costs, export taxes, and government administrative changes. China becoming a net importer of aluminum during 2008/9 as new capacity is postponed, and unprofitable capacity is closed.
Resource intensive growth lead by the BRIC countries due to urbanization and infrastructure development will further support global demand and counter any stagnation in the North American market.
Finally, aluminum inventories have reportedly fallen to the lowest level since reliable records began, just 3.27 weeks consumption, further supporting the downside for price movements.
If these views turn out to be correct, U.S. aluminum consumers could be caught next year between falling or stagnant demand for their semi- or finished products on one hand and rising metal costs on the other. Margins could be under severe pressure at a time when the market is least able to accept a price rise. So much for a prosperous New Year!