Aluminum prices fell 13 percent in the past three weeks, dropping from $3,317 per ton this July to $2,877 on the LME this Friday, but these weak prices won’t last long. In fact, Barclays Capital predicts that the average aluminum price will increase 70 percent through 2009, while Citigroup Inc. and Deutsche Bank AG told Bloomberg earlier this week that we should encounter a supply deficit through 2010.
According to Bloomberg, the market has witnessed a nine percent growth in global demand for aluminum each year, twice the growth rate of the world’s economy. By 2020, demand is expected to double, and aluminum producer Alcoa reveals that this would require about 80 new smelters, each with capacities to forge 400,000 tons each. The current state of gas prices, however, makes this seem far from possible. Instead, several companies and countries are calling off plans for new smelters, while others, such as Alcoa Inc., Rio Tinto Group and BHP Billiton, are cutting aluminum output and decreasing capacity.
Half the cost of aluminum production comes from energy expenses, and high energy prices lead to bullish feelings towards aluminum. Only a decline in energy prices can help increase aluminum output. Luckily, some analysts forecast precisely this opportunity and note: “Crude oil has fallen 13 percent since trading at a record $147 a barrel on July 11. Lehman said July 15 crude will average $93 a barrel next year, from a $114 so far this year. Dresdner said July 31 there will be a Ã‹Å“rapid price retrenchment” before the year end as new production starts.”
Although it looms on the horizon, we have yet to experience an aluminum shortage, another point that could rule in aluminum’s favor. The Bloomberg article adds:
Aluminum is cheap compared with the five other metals traded on the LME. Aluminum had an annual return of 12 percent for the five years through 2007, compared with 34 percent for copper and 42 percent for lead.
In July, Frankfurt-based Commerzbank AG raised its 2008 average price estimate to $3,600 next year on expectations China, the world’s largest producer, will become a net importer. Barclays Capital is estimating an average price of $4,500 in 2009.