Aluminum to hit record highs as energy costs climb
By Karl Plume
CHICAGO, June 25 (Reuters) - Rising smelter input costs mostly due to soaring energy prices will drive aluminum prices to record highs, possibly this year, economists said at an industry gathering this week.
Growing aluminum demand from China and narrowing inventories in terms of weeks of consumption will further fuel price gains through the end of the decade, they said.
China's rapid urbanization and rising per capita wealth have boosted demand for the lightweight metal, used in products ranging from power lines, cars, food and beverage packaging, and construction.
Demand from China could be strong enough to overcome a drag from the United States and Europe, where demand growth has been relatively flat.
"China's structural demand boom and a restrained supply have unleashed an upward trend in aluminum output and capex (capital expenditure) costs that is far from over," said Harbor Intelligence analyst Jorge Vazquez.
Aluminum prices tend to average close to the marginal cost of production, he said.
Aluminum MAL3 rose above $3,100 a tonne this week, just short of the record high of $3,310 set in May 2006.
Analysts with Harbor intelligence said aluminum prices could remain range bound between $2,875 and $3,200 per tonne in the near term but begin rising toward $3,300 by the end of the year and nearly $4,000 a year later.
BRISK DEMAND GROWTH
Current global aluminum demand growth of nearly 8 percent a year has outpaced historical trends amid soaring demand from the developing world, mostly China, which accounts for about a third of global consumption.
China also is the largest aluminum-producing nation, but power constraints are driving up output costs and slowing the industry's growth rate in the world's most populous country.
"The growth in Chinese smelter output in the second half of the year will not meet consensus expectations. We don't think you're going to see 15 million tonnes of aluminum production in China this year," said Gayle Berry, associate director of commodities research at Barclays Capital.
Energy accounts for between a third and 45 percent of the cost of producing aluminum. U.S. crude oil prices are up nearly 40 percent since the start of 2008.
"Aluminum prices react to oil prices with a lag of 10 to 12 months. So, if you see oil prices reaching new highs that means aluminum prices will tend to reach new highs in the next 10 to 12 months," Harbor's Vazquez said.
Economists also predicted a supply deficit of aluminum this year, which should lead to much higher average prices.
"Whether it's six months from now or 12 months from now, higher prices are coming. Unless we see a dramatic 50 percent drop in the price of oil, you're going to see higher aluminum prices next year," said Mark Bodner, CEO of MB Consulting and former UC Rusal aluminum sales director.
"I can comfortably say I see $4,000 a tonne longer term for aluminum." (Reporting by Karl Plume; Editing by David Gregorio)
