Bloomberg
Billionaire Oleg Deripaska’s forecast for a potential aluminum shortage and record global car output predicted by Carlos Ghosn mean the world’s second most- used metal may be about to rebound.
Smelters will shut this quarter because about 70 percent are unprofitable after aluminum fell as much as 27 percent in two months, said Deripaska, chief executive officer of United Co. Rusal, the largest producer. Ghosn, CEO of Renault SA and Nissan Motor Corp., expects car production to gain about 11 percent this year. Transportation is the biggest use for aluminum.
The executives are more bullish than Wall Street, where the median in a Bloomberg survey of 19 analysts is for the metal to average $2,100 a metric ton in the fourth quarter, 7.1 percent more than now. Harbor Intelligence, the researcher which correctly predicted a 2009 closing price above $2,200, forecasts prices as high as $2,500 before the end of this year.
“We see a long, steady climb for aluminum,” said Andrew Karsh, who helps manage $4.8 billion for the Credit Suisse Total Commodity Return Strategy team in New York. “We’ve been having a reactionary market instead of one that is driven by the fundamentals. The fundamentals are still strong.”
The U.S. will grow the most in six years in 2010 and China, the biggest aluminum consumer, will expand at three times that pace, according to as many as 67 economists surveyed by Bloomberg. Manufacturing is leading the rebound in the world’s largest economy, rising for a 10th month in May, while construction spending in April added the most since 2000. One in every five tons of aluminum is used in building.
Indebted Nations
The growth is coinciding with concern that Europe’s most indebted nations will derail the region’s recovery as governments shrink budget deficits. Western Europe accounts for about 15 percent of aluminum demand. The Standard & Poor’s GSCI Index of 24 raw materials fell 19 percent in the three weeks to May 25 and as much as $7.7 trillion was wiped off the value of global equities from mid-April to the end of last month.
Aluminum fell $1 to $1,944 last week, while the Standard & Poor’s 500 Index gained 2.4 percent, erasing this year’s loss. The S&P GSCI Index advanced 3.5 percent.
Aluminum for delivery in three months closed 0.9 percent higher at $1,961 in London after China signaled it will relax the yuan’s fixed rate to the dollar, boosting optimism for increased sales in the world’s third-largest economy.
Shares Rally
Shares of Rusal gained 5.8 percent in Hong Kong, paring the decline since they listed in January to 34 percent. Alcoa Inc., the third-largest producer, rallied as much as 9.1 percent in New York, closing up 5.5 percent at $11.72 and leaving the decline since January at 7.9 percent. Rio Tinto Group, the second-biggest, jumped 5 percent in London, erasing this year’s loss.
“The price drop that we’ve seen is something that we view as a shorter-term correction because fear is increasing above normal levels,” said Jesus Villegas, an analyst at Laredo, Texas-based Harbor. “Historical evidence has shown that in years when demand grows pretty quickly, like we are expecting in the next two years, production increases tend to lag,” he said, predicting the biggest supply shortfall in five years in 2011.
Smelters may shut facilities that can make 2 million to 3 million tons in the second and third quarters, equal to about half of annual North American demand, Deripaska said in an interview June 9 in Hong Kong.
Capacity Offline
In March 2009, 7.3 million tons of capacity was offline, Barclays Capital estimated last year. Prices had slumped 62 percent in seven months from a record $3,380.15 in July 2008. Aluminum rallied 95 percent from February 2009 to April this year, boosting earnings for Rusal, Rio Tinto and Alcoa. It fell to $1,828 on June 7.
The consensus among analysts has been too pessimistic before. A year ago, their median forecast for this year’s average was $1,700, according to estimates compiled by Bloomberg at the time. The actual average this year has been $2,173.
Part of their sentiment is explained by the near-record stockpiles held in warehouses monitored by the London Metal Exchange. Inventory of 4.47 million tons is five times the average since 1980 and more than Europe makes in a year.
LME-monitored reserves are little changed from a year ago and about 80 percent is tied to transactions, making it behave as a “financial asset rather than an industrial feedstock,” said Daniel Brebner, an analyst at Deutsche Bank AG in London. Projections for interest rates to remain near record lows in the next 12 months mean the metal may not return to the market any time soon, he said.
‘Not an Impediment’
“High exchange stocks will not be an impediment to higher prices as long as most of this material remains tied up in long- term financing deals,” said Nic Brown, an analyst at Natixis Commodity Markets Ltd. in London, who expects a second-half average of $2,450. His forecast for 2010 demand growth of 13 percent compares with Barclays’s projection of 12 percent, the fastest pace in at least a quarter-century.
Ghosn of Yokohama-based Nissan, Japan’s third-largest automaker, told investors a month ago that while 2010 would be a “challenging” year, “the worst of the crisis is behind us.” His forecast for record global car sales of 70 million compares with 63 million last year and the previous all-time high was 68.5 million in 2007, Renault’s press office said in an e-mail. Nissan forecast May 12 that profit will more than triple this fiscal year. Its shares dropped 15 percent in Tokyo trading this year.
Auto Sales
U.S. auto sales rose to 1.1 million in May, the eighth straight monthly increase, as General Motors Co., Ford Motor Co., Chrysler Group LLC, Nissan and Hyundai Motor Co. exceeded analysts’ delivery estimates. On average, 8.6 percent of a North American car’s weight is made up of aluminum, according to the Arlington, Virginia-based Aluminum Association’s Aluminum Transportation Group.
Demand from the airline industry may weaken. Production of commercial jetliners will drop to 882 units this year, from 960 last year, according to December estimates from Fairfax, Virginia-based aviation consultant Teal Group. Boeing Co. says a typical 747 uses about 66 tons of aluminum alloy.
A slower global recovery may curtail the rally. Group of 20 finance chiefs meeting in South Korea this month said the rebound faces “significant challenges” and International Monetary Fund Deputy Managing Director Naoyuki Shinohara warned June 9 of more risks. U.S. housing starts fell in May by the most since March 2009, Commerce Department data show.
Surplus Production
China, accounting for 40 percent of global output, exported more of the refined metal in April than it imported for the first time since the end of 2008. China will produce 510,000 tons more than it needs this year, Barclays estimates.
A rally would mean fewer unprofitable smelters, limiting shutdowns and encouraging mothballed plants to reopen. Prices at $2,200 or more would probably encourage capacity to come back on line, said Julian Kettle, a London-based analyst at researcher Brook Hunt, a Wood Mackenzie company. Barclays expects output to rise 11 percent to 42 million tons this year, worth about $98 billion at the five-year average price of $2,328.
Cutbacks have yet to appear. Global output rose to a record daily average of 112,500 tons in April, according to the London- based International Aluminium Institute, which says steel is the most-used metal. It was 112,300 tons a day in May.
European Premiums
Rising production is not being reflected in availability. European premiums, or the fee added to the price of metal for immediate delivery on the LME, will probably be as much as $115 a ton this month, compared with $60 in January, because of a scarcity of available metal, according to London-based researcher CRU Group. Premiums in Japan more than doubled in a year.
Capacity is also being added in regions where power costs are lower. Globally, energy accounts for about 39 percent of total costs, according to Bank of America Merrill Lynch.
New smelters in Abu Dhabi and Qatar and Chinese plants will add capacity this year, Barclays said in a report this month. That will be partly offset by Europe, where about two-thirds of plants “are in danger of closure” before the end of 2013, the European Aluminium Association says.
Energy may stunt the growth of output in China, where the government is raising power surcharges by as much as 100 percent for some energy-intensive companies starting this month.
Supply could also be kept off the market by exchange-traded funds backed by the metal. Rusal said in April it was in talks to supply metal to banks for possible ETFs.
Swing to Profit
Deripaska’s company said in May it swung to a first-quarter profit from a loss. Rio, based in London, will more than double earnings per share to $6.82 this year, according to the mean estimate of 17 analysts surveyed by Bloomberg. Alcoa, based in New York, will post earnings per share of 30.3 cents this year, compared with a loss of $1.06 last year, the estimates show.
“You aren’t going to see a lot of downside risks from here,” Deutsche Bank’s Brebner said. “It will probably start to hurt in the $1,900 to $2,000 region and now we are below that so there is probably pressure growing.”
Smelters will shut this quarter because about 70 percent are unprofitable after aluminum fell as much as 27 percent in two months, said Deripaska, chief executive officer of United Co. Rusal, the largest producer. Ghosn, CEO of Renault SA and Nissan Motor Corp., expects car production to gain about 11 percent this year. Transportation is the biggest use for aluminum.
The executives are more bullish than Wall Street, where the median in a Bloomberg survey of 19 analysts is for the metal to average $2,100 a metric ton in the fourth quarter, 7.1 percent more than now. Harbor Intelligence, the researcher which correctly predicted a 2009 closing price above $2,200, forecasts prices as high as $2,500 before the end of this year.
“We see a long, steady climb for aluminum,” said Andrew Karsh, who helps manage $4.8 billion for the Credit Suisse Total Commodity Return Strategy team in New York. “We’ve been having a reactionary market instead of one that is driven by the fundamentals. The fundamentals are still strong.”
The U.S. will grow the most in six years in 2010 and China, the biggest aluminum consumer, will expand at three times that pace, according to as many as 67 economists surveyed by Bloomberg. Manufacturing is leading the rebound in the world’s largest economy, rising for a 10th month in May, while construction spending in April added the most since 2000. One in every five tons of aluminum is used in building.
Indebted Nations
The growth is coinciding with concern that Europe’s most indebted nations will derail the region’s recovery as governments shrink budget deficits. Western Europe accounts for about 15 percent of aluminum demand. The Standard & Poor’s GSCI Index of 24 raw materials fell 19 percent in the three weeks to May 25 and as much as $7.7 trillion was wiped off the value of global equities from mid-April to the end of last month.
Aluminum fell $1 to $1,944 last week, while the Standard & Poor’s 500 Index gained 2.4 percent, erasing this year’s loss. The S&P GSCI Index advanced 3.5 percent.
Aluminum for delivery in three months closed 0.9 percent higher at $1,961 in London after China signaled it will relax the yuan’s fixed rate to the dollar, boosting optimism for increased sales in the world’s third-largest economy.
Shares Rally
Shares of Rusal gained 5.8 percent in Hong Kong, paring the decline since they listed in January to 34 percent. Alcoa Inc., the third-largest producer, rallied as much as 9.1 percent in New York, closing up 5.5 percent at $11.72 and leaving the decline since January at 7.9 percent. Rio Tinto Group, the second-biggest, jumped 5 percent in London, erasing this year’s loss.
“The price drop that we’ve seen is something that we view as a shorter-term correction because fear is increasing above normal levels,” said Jesus Villegas, an analyst at Laredo, Texas-based Harbor. “Historical evidence has shown that in years when demand grows pretty quickly, like we are expecting in the next two years, production increases tend to lag,” he said, predicting the biggest supply shortfall in five years in 2011.
Smelters may shut facilities that can make 2 million to 3 million tons in the second and third quarters, equal to about half of annual North American demand, Deripaska said in an interview June 9 in Hong Kong.
Capacity Offline
In March 2009, 7.3 million tons of capacity was offline, Barclays Capital estimated last year. Prices had slumped 62 percent in seven months from a record $3,380.15 in July 2008. Aluminum rallied 95 percent from February 2009 to April this year, boosting earnings for Rusal, Rio Tinto and Alcoa. It fell to $1,828 on June 7.
The consensus among analysts has been too pessimistic before. A year ago, their median forecast for this year’s average was $1,700, according to estimates compiled by Bloomberg at the time. The actual average this year has been $2,173.
Part of their sentiment is explained by the near-record stockpiles held in warehouses monitored by the London Metal Exchange. Inventory of 4.47 million tons is five times the average since 1980 and more than Europe makes in a year.
LME-monitored reserves are little changed from a year ago and about 80 percent is tied to transactions, making it behave as a “financial asset rather than an industrial feedstock,” said Daniel Brebner, an analyst at Deutsche Bank AG in London. Projections for interest rates to remain near record lows in the next 12 months mean the metal may not return to the market any time soon, he said.
‘Not an Impediment’
“High exchange stocks will not be an impediment to higher prices as long as most of this material remains tied up in long- term financing deals,” said Nic Brown, an analyst at Natixis Commodity Markets Ltd. in London, who expects a second-half average of $2,450. His forecast for 2010 demand growth of 13 percent compares with Barclays’s projection of 12 percent, the fastest pace in at least a quarter-century.
Ghosn of Yokohama-based Nissan, Japan’s third-largest automaker, told investors a month ago that while 2010 would be a “challenging” year, “the worst of the crisis is behind us.” His forecast for record global car sales of 70 million compares with 63 million last year and the previous all-time high was 68.5 million in 2007, Renault’s press office said in an e-mail. Nissan forecast May 12 that profit will more than triple this fiscal year. Its shares dropped 15 percent in Tokyo trading this year.
Auto Sales
U.S. auto sales rose to 1.1 million in May, the eighth straight monthly increase, as General Motors Co., Ford Motor Co., Chrysler Group LLC, Nissan and Hyundai Motor Co. exceeded analysts’ delivery estimates. On average, 8.6 percent of a North American car’s weight is made up of aluminum, according to the Arlington, Virginia-based Aluminum Association’s Aluminum Transportation Group.
Demand from the airline industry may weaken. Production of commercial jetliners will drop to 882 units this year, from 960 last year, according to December estimates from Fairfax, Virginia-based aviation consultant Teal Group. Boeing Co. says a typical 747 uses about 66 tons of aluminum alloy.
A slower global recovery may curtail the rally. Group of 20 finance chiefs meeting in South Korea this month said the rebound faces “significant challenges” and International Monetary Fund Deputy Managing Director Naoyuki Shinohara warned June 9 of more risks. U.S. housing starts fell in May by the most since March 2009, Commerce Department data show.
Surplus Production
China, accounting for 40 percent of global output, exported more of the refined metal in April than it imported for the first time since the end of 2008. China will produce 510,000 tons more than it needs this year, Barclays estimates.
A rally would mean fewer unprofitable smelters, limiting shutdowns and encouraging mothballed plants to reopen. Prices at $2,200 or more would probably encourage capacity to come back on line, said Julian Kettle, a London-based analyst at researcher Brook Hunt, a Wood Mackenzie company. Barclays expects output to rise 11 percent to 42 million tons this year, worth about $98 billion at the five-year average price of $2,328.
Cutbacks have yet to appear. Global output rose to a record daily average of 112,500 tons in April, according to the London- based International Aluminium Institute, which says steel is the most-used metal. It was 112,300 tons a day in May.
European Premiums
Rising production is not being reflected in availability. European premiums, or the fee added to the price of metal for immediate delivery on the LME, will probably be as much as $115 a ton this month, compared with $60 in January, because of a scarcity of available metal, according to London-based researcher CRU Group. Premiums in Japan more than doubled in a year.
Capacity is also being added in regions where power costs are lower. Globally, energy accounts for about 39 percent of total costs, according to Bank of America Merrill Lynch.
New smelters in Abu Dhabi and Qatar and Chinese plants will add capacity this year, Barclays said in a report this month. That will be partly offset by Europe, where about two-thirds of plants “are in danger of closure” before the end of 2013, the European Aluminium Association says.
Energy may stunt the growth of output in China, where the government is raising power surcharges by as much as 100 percent for some energy-intensive companies starting this month.
Supply could also be kept off the market by exchange-traded funds backed by the metal. Rusal said in April it was in talks to supply metal to banks for possible ETFs.
Swing to Profit
Deripaska’s company said in May it swung to a first-quarter profit from a loss. Rio, based in London, will more than double earnings per share to $6.82 this year, according to the mean estimate of 17 analysts surveyed by Bloomberg. Alcoa, based in New York, will post earnings per share of 30.3 cents this year, compared with a loss of $1.06 last year, the estimates show.
“You aren’t going to see a lot of downside risks from here,” Deutsche Bank’s Brebner said. “It will probably start to hurt in the $1,900 to $2,000 region and now we are below that so there is probably pressure growing.”
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