Aluminum ripe for turnaround, Macquarie says

Before the bottom fell out of the aluminum market, global demand for the versatile metal was growing more strongly than for any other base metal, according to a research report by Macquarie Equity Markets published last month.

The financial crisis put an end to that with the de-stocking that ensued in the fourth quarter of 2008 and the first quarter of 2009 driving up aluminum inventories to record highs of more than 17 weeks of consumption. (Since the third quarter of 2008 producers have de-stocked about 500,000 tonnes of the metal.)

But the cloud hanging over the metal is likely to dissipate over the next five years, Macquarie analysts contend. Consumption will pick up, inventories will fall and prices will stabilize, the Australian investment bank outlines in a 70-page analysis of the metal and the prospects for Russian aluminum giant UC Rusal, the world’s largest aluminum producer.

“After three years of surplus our forecasts see aluminum returning to balance through 2010-2012,” the report’s authors assert. “We forecast a balanced market in 2010 and 2011, and a small surplus in 2012 (a year in which several smelters add significant amounts of new capacity).”

Prices have already rallied from their trough in early 2009 (at about $1,250 per tonne) to $2,250 per tonne in December. The bank forecasts prices will jump from an average of about $1,650 per tonne in 2009 to $2,200 per tonne by 2012.

“If we were to hold the mid-December spot price constant for the remainder of 2010 there is around 10-15% upside to our 2010 forecasts,” the report outlines. “Our long-term aluminum price is $2,425 per tonne (or US$1.10 per lb.) based on our estimate of long-term cost positions of aluminum smelters.”

Macquarie believes that growth in the rapidly urbanizing economies of China and India, along with growth in the Middle East, Russia and Eastern Europe, will sustain demand for aluminum.

“Over the next five to ten years we expect China, as well as the Middle East, Russia, India and Latin America to continue to grow rapidly and we expect the latter group will become much more noticeable and to contribute to a continued accelerated period of extremely strong global demand,” the report maintains. “Growth from these countries averaged 8% per year over the past six years, and although individually these areas are small enough to go almost unnoticed in any analysis of aluminum demand, together they already account for about 15% of world demand (almost twice the USA or equal to Europe plus Japan.)”

At the same time, tight copper supply over the next one or two years will continue to serve as an incentive for industries to substitute aluminum for the red metal. Between 2003 and 2008, aluminum increasingly has been substituted for copper in wire and cable applications.

“Copper will continue to trade at three times the level of the aluminum price or higher,” Macquarie writes. “Historically aluminum becomes attractive relative to copper in various applications once prices trade at these levels. Given this we anticipate that incentive to substitute towards aluminum and invest in research and development to further that end will be strong.” (Aluminum has also replaced zinc in die casting and nickel-stainless steel in applications where appearance is more important than corrosion resistance.)

If history is any guide, aluminum should rebound strongly. Between 2003 and 2009, demand for the metal globally grew at an average annual compound rate of 3.6%. By contrast, copper demand in the same period grew by 1.8% per year and nickel by 0.8% per year.

Of course as for most metals, economic growth in China will be key. But on that front Macquarie is optimistic that Chinese government stimulus spending as well as the country’s rapidly urbanizing population will sustain demand.

Transportation and construction account for about 60% of the country’s total demand for aluminum and Macquarie points out that in the first half of 2009, floor space under construction in China was up 29% year on year; investment in the property market was up 14.75 year on year and floor space sold was up by 34% year on year.

“There is no doubt that Chinese demand for aluminum has a lot of room to grow over the short and medium term, in terms of per capita consumption and before China can be called a developed country,” the report maintains.

Looking ahead, Macquarie expects global demand for aluminum will grow by more than 22 million tonnes between now and 2020, indicating a need for additional aluminum smelting and alumina refining capacity over the next decade. (Global aluminum demand grew by 13 million tonnes between 2000 and 2010 and by 6 million tonnes between 1990 and 2000.)

Finally Macquarie also argues that rising costs should support aluminum prices going forward.