Stable-Higher Aluminum Expected From Participants, Delegates At Conference

Analysts and delegates attending an aluminum conference in Chicago this week look for stable to higher prices and premiums next year.

A series of speakers at Harbor Intelligence’s Annual Aluminum Outlook Conference spoke on topics such as improving demand helped by the auto and commercial aircraft sectors, as well as substitution of aluminum for more expensive copper. The U.S. itself has an aluminum-market deficit, which should boost the widely followed Midwest premium, a Harbor analyst told the gathering.

Some 210 registered delegates are attending the conference. Late Tuesday morning, a survey of participants showed that 75% expect relatively stable London Metal Exchange prices averaging $2,400 to $2,600 a metric ton in 2012. Fifty-eight percent anticipated the regional premium they pay will increase next year.

Jorge Vazquez, founder and manager of Harbor Intelligence, was more upbeat, saying he envisions a three-year uptrend with prices “north of $3,000 from 2012 on.” This translates to around $1.35 a pound.

LME prices closed Monday at $2,531.

Chinese production will fill much of any global aluminum output gap, but support nevertheless will come from a lack of cheap energy and environmental and political issues, including the time it takes to build a smelter in Western nations, Vazquez said.

He said aluminum demand has hit new highs and an internal deficit in the key commodity-consuming nation of China is widening. Visible inventories in the country more than halved in 2010, while consumers/traders heavily de-stocked at least 3.5 million metric tons up to June. Theoretically, China could become a net importer of aluminum, even though 10 fully committed, verified expansion projects are coming in the next 18 months, Vazquez said.

David Wilson, senior base metals analyst with Societe Generale, said aluminum demand is expected to grow by 7.6% over the next five years as aluminum gets substituted for copper because of high prices for the latter. Societe Generale anticipates an aluminum deficit by 2013, but doesn’t expect it to last long.

He and others noted that electricity shortages could curb Chinese output this summer, although this has not occurred yet.

Most global commodities have corrected lower lately on economic concerns, one of which is slower Chinese growth brought about by monetary tightening. However, the world’s most populous nation should avoid a so-called hard landing, said Michael Lewis, head of commodity research for Deutsche Bank.

“Aluminum may prove resilient in this scenario if energy prices remain high, power constraints in China intensify and aluminum imports accelerate,” Lewis said.

Deutsche Bank looks for an aluminum market surplus to disappear by next year, with higher prices as a result, Lewis said. He also cited potential for increased investment demand should base-metals exchange-traded funds gain in popularity.

One conference speaker reported that output for autos and commercial aircraft, which require the use of aluminum, is expanding, although aluminum needed for beverage cans has fallen.

North American auto production rose 38% in 2010 and is up another 11% year to date, said Lloyd O’Carroll, senior vice president and metals equity analyst for Davenport & Co. Production is expected to rebound 13% in 2011 and 10% in 2012. Further, the amount of aluminum used via substitution will likely rise to make cars lighter and meet fuel efficiency standards. In 2011, the weighted average of aluminum per car in North America is 337 pounds. For 2012, this is estimated at 342, O’Carroll reported.

Commercial aircraft manufacturing is also picking up, O’Carroll said. For 2011, total aircraft deliveries are seen up 13.6%, with aluminum usage per unit up 3.2%. In 2012, deliveries are seen up 11.1% and aluminum usage up 8.4%.

Further, aluminum shipments for construction are expected to rise in 2011 after yearly losses since as far back as 2006, O’Carroll said. In 2010, construction was down 7.8% at 1,789 million pounds, but in 2011 that figure is seen at 1,879 million pounds, up 5%. For 2012, the figure is seen rising 16.1% to 2,182 million pounds. While housing construction and other building will take time to return to pre-financial-crash levels, the repair and restoration side of this industry is doing well, particularly since those who have had their buildings foreclosed upon are stripping gutters and other exposed metal for recycling.

However, total aluminum can shipments for 2011 are seen at 95.7 billion cans, down 0.8% from 2010, O’Carroll said. In 2012, the figure is forecast at 94.9 billion. Aluminum can sheet per 1,000 cans has stabilized at 34.6 pounds since it is getting difficult to make cans any thinner.

O’Carroll sees a small aluminum-market surplus of 609,000 tons per year in 2011, which represents 83 days of supply. By 2012, the surplus would turn into a slight deficit of 108,000 tons, or 75 days of supply, O’Carroll said. He listed price forecasts of $1.15 a pound in 2011, $1.17 in 2012, $1.14 in 2013 and $1.14 in 2014.

Vazquez said the U.S. economy should improve slightly in the second half of the year, but Europe could slow due to austerity measures in some debt-plagued nations and higher interest rates.

Harbor Analyst Looks For More Strength In Premiums

Another Harbor analyst, Jesus Villegas, told the conference that U.S. Midwest and Latin American aluminum premiums should continue to rise in the next 12 months.

U.S. Midwest premiums hit record highs around 9 to 10 cents a pound in mid-May, with 13.5 cents in Latin America, Villegas reported. He cited higher fuel prices and increasing market tightness. He said there is an aluminum deficit in the U.S., while a surplus in Latin America is shrinking. Brazil is shifting from being a net exporter to net importer as output falls.

The Latin American and Canadian surplus will no longer be enough to cover the U.S. deficit, Villegas said. Nearly 90% of U.S. imports come from the region.

U.S. Midwest premiums should rise to 9.4 cents a pound by the fourth quarter from 6.5 seen in the first quarter, Villegas said. By the end of 2012, Harbor sees the premium at 11.5 cents.

The Brazilian premium is seen at 14.1 cents by the end of 2011, compared to 12.7 cents in the first quarter. By the end of 2012 the premium is forecast at 16.3 cents. In Mexico, the fourth-quarter 2011 premium is seen at 12.3 cents, compared to 10.2 cents in the first quarter. By the end of 2012, the Mexican premium is seen at 12.8 cents.

Potential restarts could boost aluminum output in the Americas, Villegas said. Still, even if all production returns, market deficits will still occur for 2011 and 2012.

Villegas reported that there is over 1.1 million tons of permanently idled annual aluminum production in the Americas. Restarts from idled smelters could eventually bring back 917,000 tons per year, while operating smelters could add another 392,000 tons per year. So far, already-committed restart announcements account for only 334,000 per year.