HardAssetsInvestor

Written by Julian Murdoch  |

September 24, 2009

What’s In Store For Aluminum?

Details

Amid high inventories and increasing production, aluminum has many investors scratching their heads.

• Going up? Going down? Yes!
• Physical ETF in the offing?
• Futures vs. equities

 

Aluminum's Future: A Mixed Bag

As always, gazing into the future of a commodity is an iffy proposition at best, but usually there is at least some general consensus on where the market's trending. For aluminum, however, that's not quite the case at the moment.

At the ISRI Commodities Roundtable Forum on aluminum last week, one analyst reportedly suggested that aluminum could rise to $3,000 per metric ton by May 2010—quite a jump from this year's prices, which have fluctuated between just over $1,000 to just under $2,000 so far. Even looking historically, the highest price aluminum has hit in the past five years is comfortably under the $3,000 mark.

Many producers also have positive—albeit more conservative—estimates. Rio Tinto Alcan, for example, expects long-term aluminum demand growth to be along the lines of 4-6%. In the short term, though, executives are more cautious, stressing their current strategy of cash preservation instead of talking price.

But not all analysts are quite so pie-in-the-sky optimistic; Goldman Sachs' forecast is a downright downer. Goldman sees aluminum trading at a much more modest $1,700 per metric ton, or 78 cents per pound—a price below Tuesday's cash price of $1,864.50 per metric ton (84.5 cents per pound).

 

Why The Confusion?

Conflicting forces are at play in the aluminum market. On the one hand, you've got the general, though cautious, optimism of global recovery; a weaker U.S. dollar (pretty much always positive for commodity prices); and China's recent transformation into a net importer of unwrought aluminum.

On the other hand, current aluminum inventory levels at the London Metal Exchange are very high:

 

 

To offset this inventory overhang, the industry has announced "a significant amount of smelter curtailments" (Mineweb). But even so, market demand has not been high enough to bring down existing inventories.

Besides, not everyone has closed smelters. And by "not everyone," I mean China.

China has consumed more aluminum this year than in 2008, and at the same time, it has also created new smelting capacity. According to a Reuters report, Chinese smelter capacity has grown at such a rate that utilization is only about 75%, which gives China plenty of room to keep on smelting.

Thus we're in this bizarre world of high inventories and increasing production. The International Aluminum Institute released figures this week showing August aluminum production increased by 0.3% (6,000 metric tons) to a total of 1.954 million tons produced for the month. So it looks like producers are banking on the global economic recovery.

Meanwhile, prices have recovered very well since the beginning of the year:

 

 

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