Aluminium, the worst performer on the London Metal Exchange (LME) since 2002, has the best chance to advance for at least the next six months.
A growing number of investors say takeovers of Alcan Inc. of Canada and Russia’s OAO Sual Group may reduce aluminium production as China, the world’s largest supplier, cuts exports. Aluminium will be the only metal on the LME to gain for the rest of 2007, while copper, nickel, zinc and tin decline, futures markets show.
United Co. Rusal, the Russian aluminium company controlled by billionaire Oleg Deripaska, expects the metal to appreciate 50% to $4,000 (Rs16,4000) a tonne as early as next year. Prices will probably rise through 2010, say Deutsche Bank AG, UBS AG and JPMorgan Chase & Co., increasing profit for miners BHP Billiton Ltd and Alcoa Inc. and hurting consumers such as Boeing Co. and bottlers for Coca-Cola Co.
“Aluminium futures are the best place to park your money,” says Jon Bergtheil, head of global metals strategy at JPMorgan in London. “Copper and nickel have more downside potential than aluminium.”
Aluminium for immediate delivery in the so-called cash market is selling for $2,675.80 a tonne, and futures contracts indicate that prices will reach $2,756 in February.
Forging ahead: A worker ladles molten aluminium in Russia. The per capita consumption of aluminium in China is 10kg a year, in Russia, 5kg, in the US, 34kg and in Germany, more than 50kg.
Copper, now at $7,678 a tonne, will decline to about $7,350 while nickel will slide from $36,315 to $35,420 on the LME.
Rising energy costs threaten to drive up prices because aluminium production consumes 15MW of power for each tonne, equal to €370 ($501) for the typical smelter plant in Germany. Power to be delivered in 2010 now sells for €55 a megawatt-hour, or €825 a tonne of aluminium, according to prices from broker GFI. Metal prices will keep pace or manufacturers may shut smelters to save money.
‘World will pay’
“There hasn’t been investment in the industry over the past two decades, and the world will pay the price for that,” says Jim Rogers, the chairman of New York-based Beeland Interests Inc. and author of Hot Commodities. “It has much higher energy costs compared with the other base metals, and as plants are taken off stream because of rising costs, we will see a tightening in supply.”
Aluminium also is buoyed by the prospect of the biggest producers wielding more power than Organization of Petroleum Exporting Countries (OPEC) does in the oil market.
Alcoa’s hostile $28 billion bid for Alcan may result in the world’s five largest aluminium producers controlling 54% of world supply, compared with 43% a year ago. By comparison, the 12-member OPEC pumps 41% of the world’s oil.
Alcoa, Rusal, BHP Billiton and the rest of the industry sell about $85 billion of aluminium a year to makers of beer cans, aircrafts, window frames and car parts.
Higher prices may hurt profits at companies ranging from Pepsi-Cola Bottling Co. to Airbus SAS to Ford Motor Co.
“Alcoa and Alcan getting together, that’s probably the key issue for the commodity right now,” says Tom Williams, the head of purchasing for Airbus in Toulouse, France.
“We want to be sure that whatever happens we still end up with a sensible competitive environment at the end of it.” The average aircraft is 80% aluminium.
Alcoa wants Montreal-based Alcan so it can expand capacity to meet a doubling of demand by 2020, according to spokesman Kevin Lowery. This year, production will outstrip demand by 576,000 tonnes, according to CRU, a London-based metals consultant.
The takeover “will bring the strength of two companies to bear to make sure we can elevate what we do for our customers,” says Lowery. Alcoa, based in New York, is prepared to sell assets to resolve antitrust issues, he said.
Aluminium is cheap relative to every other metal on the LME, the result of production in China. The metal has increased on average of 14% a year for the past five years, compared with 26% for tin and 42% for lead.
The price of aluminium will rise next year to $3,086 a tonne, or $1.40 a pound, up from an earlier forecast of $1.30 a pound, according to Dan Brebner at UBS in London, because of raw material and energy costs. Aluminium has averaged $2,774 a tonne so far this year.
“In 2008, it looks like aluminium could outperform the other metals,” says Brebner, executive director of commodities research.
China’s decision on 19 June to rein in production by removing a tax rebate on shipments of aluminium rods and bars may result in the country importing more aluminium than it exports by 2009, said Michael Widmer, head of metals research at Calyon in London. “That should be a big support for prices,” he said.
Demand for aluminium in China, which is also the world’s largest consumer of the metal, will grow 20% this year, outstripping the rise in domestic production, Deutsche Bank AG said in a 22 June report. Investors who followed Deutsche Bank’s advice to buy aluminium in April 2005 earned a 49% profit in 16 months.
The per capita consumption of aluminium in China is 10kg a year, in Russia, 5kg, in the US, 34kg and in Germany, more than 50kg, according to Rusal estimates.
Charts tracking aluminium for delivery 63 months from now show the greatest demand after 2008. The price for the December 2010 contract gained 9.5% to $2,410 a tonne as of 22 June, while the most widely traded three-month contract has lost 1.8% during the same period.
“The far forward fund buying is significant,” says Mo Ahmadzadeh, president of metals trading at Mitsui Bussan Commodities in New York.
Rusal, created this year through the merger of OAO Russian Aluminium, OAO Sual Group and the alumina unit of Glencore International AG, is anticipating a surge in demand. The company plans to expand three plants and build two more as soon as 2012.
Chief executive officer Alexander Bulygin said in March that aluminium may reach $4,000 a tonne as early as next year.
Aluminium has a “very favourable long-term outlook,” Artem Volynets, Rusal’s head of strategy, said in a 29 June interview in which he declined to give a specific forecast. “We expect to see a very interesting picture when China shifts into the importer position.”
Prices also are helped by a slowdown in smelter construction. Aluminium Corp. of Bahrain is facing a natural gas shortage that may scuttle a plan to increase annual capacity to 1.2 million tonnes. Alba, as the company is known, is trying to buy gas from Qatar to supply its factory.
“If you look past the next five years, some people see very little downside because they believe there will be less supply and the cost of producing this commodity will only go up,” says Adam Rowley, an analyst at Macquarie Bank Ltd in London. Increasing energy demand worldwide means “there is less need to sell it cheaply to smelters.”
Saijel Kishan in London, Glenys Sim in Singapore, Dale Crofts in Chicago, Andrea Rothman in Toulouse and Yuriy Humber in Moscow contributed to this story