10 January
San Francisco,
Dow Jones

Aluminum, found in everything from beer cans to airplane wings to window sills, has lately found its nemesis: the U.S. construction market, where a fall-off in demand has sapped prices even as other metals hit new highs.

Copper, another base metal widespread in industrial applications, has rallied 6% to $7,096 a metric ton in 2007. While down from the third quarter, fourth quarter prices added 2% from the year-ago period.
Contrast that performance with aluminum, which has seen prices on three-month futures inch up only 2.6% to an average $2,662 a metric ton in 2007. In the fourth quarter, average prices fell 4% from the previous quarter and 8% from the year earlier, according to London Metal Exchange statistics.
Daily prices for the front-month futures contract chart an even more dramatic disconnect. On the New York Mercantile Exchange, aluminum futures have tumbled 7.7% last year, while copper has shot up 31%. Gold and crude oil futures have recently hit record highs.

Aluminum prices "peaked at the beginning of 2007 and dropped off toward the end of the year as demand got weaker," said Marco Georgiou, section head for primary aluminum at CRU Group, a commodities consultancy in London.

Lower aluminum prices, in turn, have dragged down shares and hurt profit in major aluminum producers like Alcoa Inc. (AA). The New York-based producer is expected to report a 55% drop in fourth-quarter earnings, partly due to lower aluminum prices. Its shares have fallen 37% from a 52-week high reached in July.

Meanwhile, the drop in aluminum prices has provided a sliver of relief for manufacturers experiencing a steep rise in other raw materials. Eastman Kodak Inc. (EK) stands to benefit from lower aluminum prices. In November, the film and digital imaging company said high aluminum costs had cut into its third-quarter gross margins.

China’s still hungry

Declines in aluminum prices have coincided with double-digit demand from China, the world’s largest consumer of the lightweight metal. In general, China’s appetite for raw materials has underwritten a global commodity boom and is frequently cited as a key rationale for forecasts of a commodities super-cycle — in other words a ten- to 15-year bull run in materials like oil and industrial metals.
"The commodities cycle is not on the downswing, it’s still moving higher," said Brian Niemiec, commodities analyst at Susquehanna Financial Group. And that’s largely due to non-U.S. demand, he said.

As the last year of price declines show, however, China’s not the only game in town. The U. S. housing recession, which has curtailed spending on construction basics like aluminum siding and door jams, has been much to blame. A cooling in the Canadian housing market and the European construction market hasn’t helped.

"The construction industry is not doing too well, and that has impacted demand," CRU’s Georgiou.
Excess capacity at smelters worldwide has also contributed to a deeper supply of aluminum.
"Compared to other metals, there is sufficient [aluminum] in the market. That’s limited the upside to growth," said Georgiou.

Some still say that strong demand from China has, and will continue, to help support prices. Alcoa, the largest aluminum producer based in North America, said in October it expects Chinese aluminum consumption to increase 36% in 2007 while North American demand fell 6%.

But metals analyst Edward Meir of MF Global says a slowdown in the United States risks derailing the recent surge in metals prices — led by copper — because China depends on U.S. consumption of Chinese-made goods.

"Some metal bulls scoff at the notion of a U.S. slowdown, pointing instead to the insatiable appetite of the Chinese for all kinds of metal," said Meir in written comments Wednesday. "We disagree with this premise…should [the U.S. economy] slow down, it could cause China to sputter in its wake," he said.