Aluminum Outlook March 29, 2007

London Metal Exchange cash aluminum prices hit an 18-year high of $3,275/mt on May 11, generally following a trend seen with all commodities, and analysts and market players said they expect fund involvement in the aluminum market to continue. But the fundamentals have also been favorable to higher prices for most of 2006.

However, over the past few months, we have seen a downturn in demand. According to the latest statistics from the Aluminum Association, November US net new aluminum order index fell 9.2% from October and 5.7% from November 2005.

Analysts are predicting global supply growth in 2006 of 6-7%, and global demand growth also of 6-7%, with Chinese supply growing at 20% and demand 22%.

For 2007, global supply growth is expected to grow by 6.5% versus demand growth of 5.6%. China is expected to be a major driver of growth next year in both supply demand with 12% production growth and 14% demand growth.

Analysts are expecting a deficit of 300,000-400,000mt this year. For 2007, the market is expected to be relatively balanced, with a surplus or a deficit of around 200,000mt.

Expected deficits likely will put further strain on already low inventories, analyst have said, allowing for aluminum prices to move somewhat higher in this environment.

The market should turn to a surplus starting in 2008, and with it, downward pressure on aluminum prices. These deficit forecasts are predicated on slower capacity growth and reasonable, though slightly below trend growth in demand.

Aluminum smelter capacity is expected to grow 4%/year for 2006-2010. Production is expected to be up 5% during that period due to the possible restart of idled capacity in North America and China, according to analysts.

As for pricing, analysts are predicting an aluminum price forecast of $1.14/lb in 2006 and $1.20/lb for 2007, after stronger-than-expected aluminum prices this year.

By region, the US economy continues to slow. The weakest part of the US economy is residential construction, with housing starts projected to be down by double-digit rates in 2006 and 2007.

The housing woes should spill over and dampen consumer spending, particularly for durable goods. However, the European economy is displaying strength, with key indicators at multi-year highs. In Asia, the Japanese economy is contributing to better growth this year than last year.

As for the specific segments, demand for aerospace products remains strong. Shipments this year to the transportation, construction and packaging sectors are expected to grow, while shipments to the automotive sector are expected to be down.

Source: Platts

[ back]