DJ Production Costs To Support Aluminum Prices -Deutsche Bank

SINGAPORE, Dec 13, 2009 (Dow Jones Commodities News Select via Comtex) -- DB | Quote | Chart | News | PowerRating -- Rising production costs are likely to help support aluminum prices going forward, Deutsche Bank said in a report dated Friday. "We believe cost-push has once again re-emerged as a force in the aluminum market, potentially limiting downside risks for pricing and constraining output in several important aluminium-producing regions," said the report. The marginal cash production costs for the aluminum industry will range between $1,900 and $2,100 a metric ton in the next 12 months, it said. It added that input costs were rising on a global basis with alumina prices rebounding to $305/ton, thermal coal prices (a longer-term driver for power) in Asia at over $80/ton and anode prices (a source of carbon used in smelting) rising with oil prices this year. In China, Deutsche Bank estimates that marginal producers currently face a cost of production around $1,980/ton, taking into account recent electricity tariff hikes, while production expansion is likely to be limited by power constraints in the long term. "Normally, aluminum smelter capacity is built in regions of low-cost, isolated power (power generation capacity away from population centers). This is clearly not the case for China. Thus, we question the sustainability of recent trends." In Europe, the report said aluminum production peaked in 2005, and with many smelters now renegotiating long-term power contracts, that will be competitive while also taking into account carbon costs. "We expect that government support (such as free allocations for carbon) will be particularly important to keep the aluminium industry alive in Europe." The bank also said output from a combined three smelters in South Africa and Mozambique could be affected by power constraints, especially during the World Cup soccer tournament in June and July 2010, when domestic power consumption could be high. At 0235 GMT, LME three-month aluminum was at $2,275/ton, flat from Friday's kerb.