Alcoa-Alcan Would Face New Pressures

Fans of Alcoa's $27 billion bid for Canadian rival Alcan might be overlooking the rising threat of competition from elsewhere, particularly China.

The outlook for aluminum prices isn't nearly as strong as it is for other raw materials in part because producers world-wide are having less trouble developing new supplies. This is especially true in China, where aluminum companies have been adding new smelting capacity at a furious pace.

This means that output from Western companies like Alcoa won't necessarily be needed to feed China's soaring demand. Aluminum demand is growing rapidly and may double by 2020 to 60 million metric tons of production, with much of it driven by consumption in China, according to Alcoa's estimates. Last year, China accounted for 25% of the world's aluminum consumption, compared with 13% six years earlier.

In a worst-case scenario, if China adds capacity faster than expected and global economic growth slows, that could lead to a significant drop in aluminum prices.

"We think China is the main risk factor to the aluminum market over the next year or so," says Michael Lewis, global head of commodities at Deutsche Bank AG in London. He adds that long-term aluminum prices could stay relatively high due to the rising costs of production.

Since supplies of aluminum aren't nearly as tight as they are for other commodities, the outlook for aluminum prices isn't as robust as it is for many other metals. While global nickel prices have shot up roughly fivefold over the past three years, and copper copper has nearly tripled, aluminum has only climbed about 60%.