Aluminum Prices Could Reach $4,000/Ton By Year End — Analysts

CHICAGO -(Dow Jones)- Constricted supplies and robust world demand could push aluminum prices up to $3,600-$4,000 per metric ton by the end of the year and $4,250-$4,500/ton by the end of 2009, industry analysts said.

As China leads a surge in global demand for aluminum, the industry is attempting to keep up in the face of rising energy prices, increasingly prevalent speculation in commodities market, and uncertainly over approaches to curb global climate change. These factors, market analysts said, are buttressing the price of a commodity already in high demand given its relatively low price compared to copper — a substitute for aluminum.

"Some analysts today expect the lowest sustainable price to be $3,500 (per ton)," said Jorge Vazquez, founder and vice president of HARBOR Intelligence’s Aluminum Intelligence Unit. He spoke Tuesday at an aluminum market and price outlook conference sponsored by HARBOR Intelligence, a strategic firm specializing in aluminum market analysis.

Vasquez said technical-chart analysis indicates that aluminum prices will rise to $3,600/ton by the end of 2008 and to $4,250/ton by the end of 2009.

"In my personal opinion, it (the price of aluminum) is more likely to go toward those prices than to stay where it is," said Mark Bodner, the chief executive officer of MB Consulting.

Bodner said UC Rusal is predicting aluminum prices at $4,000/ton by the end of 2009.

Three-month aluminum on the London Metal Exchange was trading around $3,065 late Tuesday morning, and the official LME cash price was $3,038 to $3,038.50 per ton.

Vasquez cited China’s structural boom in demand as a catalyst for continued price increases, adding that China’s aluminum demand explains 80% of the global demand growth in the past three years. This robust demand caught suppliers by surprise, he said. Global demand from other emerging countries like Brazil, Russia and India also plays a role, although to a lesser extent.

Growing demand, however, is being met by lackluster supply. After almost 30 years of stability, aluminum output costs entered into a new phase of sustained increases, a result of strong structural demand from China and supply constraints, Vasquez said.

Rising energy costs are a primary culprit. So are rising output costs for alumina and bauxite, core raw materials in aluminum production.

Just last week, aluminum giant Alcoa (AA) said it was cutting output at its Rockdale, Texas, smelter by half, or approximately 120,000 tons, largely due to rising energy costs.

"The fourth quarter average (price this year) will be $4,000 per metric ton," said Gayle Berry, associate director of Barclays Capital.

During 2009, the average price for aluminum will be $4,500/ton, she said.

Berry also cited energy prices as a source of supply losses, which is why she said Chinese production growth has peaked.

At the same time, some feel an increase in speculation has also boosted prices.

"The investment funds are playing a great role in driving up prices," said Bodner.

As market participants look to make sense of the recent surge in aluminum prices, some wonder how high prices could go.

Greg Wittbecker, director of corporate metal recycling strategy for Alcoa, reminded fellow market participants of 1987, when aluminum prices reached the record high of $4,290/ton. Only 214 days earlier, aluminum was priced at $1,620. Adjusted for inflation, $4,290 would equate to $7,733/ton in 2008 dollars.

Wittbecker declined to give an estimate of near-term aluminum prices.

Compounding confusion over future prices is the effect of global climate change policy across the world.

"This is a completely new variable that no one has ever been challenged to address and price," said Wittbecker, adding that regulatory policies could increase costs.