BEIJING, June 25 -- Chinese and global aluminum prices are likely to head lower in 2011, though improving risk appetite in the near term may give them a temporary lift, Standard Chartered said in a research note Friday.
Raw material costs for aluminum are up, with alumina costs rising 60% between the second quarter of 2009 and May this year. Carbon anode prices have increased 50% in the last few months, the bank said.
Alumina and carbon anodes together account for around half of aluminum smelting costs.
China's reduction of power tariff discounts for energy-intensive industries also hurts aluminum smelters.
"The scope for future smelter-capacity growth in China is being curtailed," Dan Smith and Judy Zhu wrote.
Beijing's move to resume an appreciation of the yuan further exposes Chinese smelters. Though it lowers import costs, the appreciation means smelters need higher London Metal Exchange aluminum prices, which are priced in dollars, to pay for rising local power, labor and raw material costs, the note said.
However, recovering global demand is likely to lift prices in the short term and has already helped reduce aluminum inventories.
But China's slowing auto sales growth and policy moves to manage a nascent property market bubble will make the recovery rocky.
"Toward the end of the year (2010), we expect poor industry fundamentals to weigh on prices once more," Smith and Zhu said.
"High cost smelters are likely to be forced to close, and we anticipate a battle for market share in 2011."