By Michael Montgomery – Exclusive to Aluminum Investing News
Demand is starting to pick up from many aluminum consuming industries, such as the aerospace and transportation sector. This should be a supportive factor for the price, which has made gains recently. In China there are plans to cut back on capacity, and demand is growing from large infrastructure projects to support their growing population. There are even forecasts that China may become a net importer of the metal in the coming years. All of these factors should increase the demand for aluminum.
Aluminum prices have been making small gains as market conditions are improving. In the second quarter of the year large inventories and reduced demand for aluminum had sent prices on a downward trajectory. Since the start of July, prices have risen from around $2,500 per tonne up to $2,612.00 per tonne on the LME as of July 26. This rebound in price is still short of the year high of $2,803 per tonne in early May.
The end of the “summer slowdown”
The rising price of aluminum is being attributed to the coming ramp up of production after the usual summer slowdown. Robin Bhar, an analyst for Credit Agricole, stated that they “expect it [aluminum demand] to accelerate after the summer slowdown with robust growth from both transport and packaging. However, most of the restocking should come towards the end of Q3.”
The transportation sector should consume more aluminum as business is picking up. Aircraft makers Boeing and Airbus are trying to keep up with large orders for jetliners. “During the recent Paris air show, the order volume for Boeing and Airbus more than doubled from a year ago, with a combined backlog of more than 7,300 planes,” said Klaus Kleinfeld, CEO of Alcoa (NYSE:AA). The number of planes is equal to 7.5 years of current airplane production.
China to become net importer
In China, aluminum production is up year over year as new capacity has come online. However, a few factors may change China’s status to a net importer of the metal in 2014. First, the Chinese government has called for more than 100 plants to phase out 619,000 tonnes outdated capacity in 2011. This is small compared with China’s overall aluminum consumption forecasted to total 18.7 million tonnes in 2011.
When the reduction of capacity is coupled with massive infrastructure projects over the next five years, it is no surprise that China may become a net importer. Beijing’s latest ‘Five Year Plan’ calls for $536 billion on rail infrastructure alone.
“Alcoa expects aluminum demand to soar as a result. [Alcoa] is seeing substitution to copper clad aluminum (CCA) cable and aluminum magnet wire in China form conventional copper products,” reported the China Daily.
Alcoa has forecast that aluminum demand in China should grow by 11.2 per cent in 2011.
Global aluminum forecasts
The demand forecasts coming from the largest aluminum companies in the world vary slightly but most are positive. Rio Tinto Alcan (LSE:RIO), the aluminum division of the mining giant, has stated that the company is remaining cautious in the short term. Jacynthe Cote, Chief Executive of Rio Tinto Alcan stated, that in the long run, there’s “still a lot to come for aluminum.” Rio Tinto’s aluminum division expects aluminum demand to rise at 5.5 per cent per year globally until 2015.
In comparison to Rio’s predictions, Austrian Aluminum Group is more hopeful. The company’s CEO, Gerhard Falch stated, “We forecast that demand for aluminum will double within the next 10 to 12 years, so a global growth rate of 7 per cent.”
Overall most analysts and major aluminum producers see healthy growth for the aluminum market in the coming years. While they may remain cautious in the short term, long term prospects are promising. This steady growth should put upward pressure on the price of the metal going forward.