Aluminum to Rise on China Demand, Alcoa Plant Closure
Aluminum prices may rise for a fourth year because of a combination of increasing demand and a relative shortage of smelters to make the metal...
Aluminum prices may rise for a fourth year because of a combination of increasing demand and a relative shortage of smelters to make the metal.
Demand will jump by 6.2 percent next year, outpacing a 4.7 percent gain in production, analyst Sophie Spartalis of Sydney- based Macquarie Bank Ltd. said in a Dec. 6 report. Alcoa Inc. and Alcan Inc., the world's two largest aluminum makers, are closing smelters because of record power costs.
``For any aluminum smelter, power represents between 30 and 40 percent of costs, and that's critical,'' said Tom Campbell, a managing director in New Zealand at the aluminum unit of Rio Tinto Group, the world's third-biggest mining company. ``The trend in energy prices has affected smelters worldwide.'' Campbell said he reduced production after electricity costs quadrupled.
Aluminum, used in cans, cars and airplanes, is likely to increase 11 percent to average $2,094 a metric ton in 2006, according to the median estimate of 11 analysts surveyed by Bloomberg. Prices of the metal for immediate delivery averaged $1,895 a ton on the London Metal Exchange this year.
Higher prices would bolster profit at producers including Pittsburgh-based Alcoa and Alcan, while driving up costs for Coca-Cola Co. and Boeing Co. Power prices are forcing aluminum plants to close in the U.S. and Europe and encouraging construction of smelters where energy costs less, such as Oman and Iceland.
Rising aluminum orders mean buyers will use almost 400,000 tons of the metal now in inventories.
``For demand, China is the key factor,'' said Peter Chilton, who helps manage A$1.1 billion ($827 million), including resource stocks, at Constellation Capital Management in Sydney.
Alcoa is shutting a 195,000 ton smelter in Frederick, Maryland. Montreal-based Alcan plans to close a 66-year-old French smelter with a capacity of 50,000 tons. Oslo-based Norsk Hydro ASA, the world's fourth-biggest aluminum maker, is idling plants in Germany, where wholesale electricity prices for next year have risen 54 percent in the past 12 months and reached a record high.
Alcan said in September that 1.6 million tons of capacity may close globally. Only two smelters will open in 2006 and 2007, says Soleil Securities analyst Charles Bradford in New York.
Energy and raw material costs at Alcoa increased by $578 million in the first nine months of the year, the company said in October. Charts supplied by Melbourne-based BHP Billiton, the world's biggest mining company, showed its aluminum smelting and refining costs rose as much as 40 percent in the last two years, UBS AG said in a Nov. 23 report.
``We haven't ever before seen such sharp increases in costs as over the past two years,'' said Eivind Reiten, chief executive officer of Norsk Hydro. ``It's more than $200 per ton. It has to do with rising energy costs, with rising alumina costs. This increase puts pressure on the weakest smelters.''
The cost of alumina, which is smelted to make aluminum, has jumped about 40 percent this year, according to Metal Bulletin, an industry publication. To make one ton of aluminum requires about two tons of the raw material.
The price of aluminum for delivery in three months jumped to $2,276 a ton on Dec. 23, the highest close since January 1989, after a decision by 23 smelting companies in China to cut output by 10 percent.
The smelters account for more than 60 percent of production in China, the world's largest supplier of the metal. Rising alumina costs have led to losses at many local smelters.
``Chronic tightness in alumina availability is constraining global aluminum production, with the impact being felt most notably in China,'' said Macquarie's Spartalis.
Forty one smelters in China stopped production this year because of higher costs and attempts by the government to control pollution, resulting in a loss of 550,000 tons of aluminum, Pan Jiazhu, vice chairman of China's Nonferrous Metals Industry Association, said Dec. 8.
``A lot of smaller businesses are going to get washed out,'' said Brian Hicks, an analyst at Texas-based U.S. Global Investors Inc., which has $2.4 billion under management, on Dec. 16. ``The market is going to get tighter going forward.''
China may have 2 million tons of spare capacity idled because of a lack of power and alumina, BHP Billiton said Nov. 23. That extra smelting capacity could lead to excess supply of the metal later, said Atul Lele, who helps manage about $224 million at White Funds Management in Sydney.
``That can lead to oversupply from six months to 12 months on,'' Lele said. ``But in the next six months, the momentum for aluminum is very strong and prices will rise.''
China, the world's largest user of aluminum, may consume 19 percent more of the metal next year as growth in the world's fastest-growing major economy stokes demand for autos and homes, China Nonferrous Metals Industry Association's Pan said.
Rising incomes in China are increasing private car ownership, and vehicle sales may rise to 9.4 million units in 2010 from 5.1 million last year, according to the government. BHP Billiton expects China's usage to more than double by 2015.
``Growth in Chinese consumption is expected to remain above 10 percent and keep global demand growing above 5 percent until at least 2008,'' RBC Capital Markets analysts led by Fraser Phillips said in a Dec. 6 report.
Aluminum futures fell as much as 150 yuan to 19,490 yuan ($2,414) a ton today on the Shanghai Futures Exchange. The most active contract has risen 18 percent this year.