Conflicting Signals on Aluminum

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A recent report in was  both contradictory  and enlightening. Analysts at Commerzbank are predicting that energy costs will stay high, leading to higher aluminum prices. Energy accounts for 40 percent  of the cost of primary aluminum, and new capacity is growing at only 4.5 percent  as new projects are hampered by unprecedented rises in the cost of energy (for example,  Rio Alcan’s smelter project in South Africa). Yet in the same article, it predicts that prices will fall from an average of $2879/mt this year to $2659/mt through 2011.

Energy influences the cost of aluminum manufacturing more than almost any other major metal, so new projects will be influenced by the cost of energy contracts. Today, the average break even point is about $2000/mt for most smelters. However, following growth in new capacity of 12 percent  last year, there is no shortage of primary metal. While power costs are clearly an influencing factor, we see the softening in Western demand and the large global stocks as bigger influences.  The fall in the U.S. dollar has influenced all commodity prices. If the currency were to stabilize this summer and begin to firm on the back of possible February rate rises towards year-end, we could see aluminum prices coming under pressure a lot sooner than 2011.

–Stuart Burns

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