CHICAGO, June 28 -- The price of aluminum is expected to climb back above the $2,000 per tonne level by the end of this year, and reach $2,450 by 2011, as supplies tighten and demand recovers from its second-worst downturn on record, analysts said this week.
"About $2,100 (per tonne) by the end of 2010, and $2,450 by the end of next year," David Thurtell, director and commodity specialist with Citigroup Global Markets told Reuters at Harbor Intelligence's Third Annual Aluminum Outlook Conference in Chicago this week.
Mark Liinamaa, vice president of market research with Morgan Stanley, had a similar forecast of $2,100 to $2,200 by the end of the year.
"I think prices have to move higher by year-end," he said. "We are optimistic about the longer-term demand prospects."
Demand for the lightweight metal used in packaging and transport has been in a slow, but steady recovery mode since late 2008, when the depth of the global financial crisis slammed the market.
"In terms of aluminum consumption, it was the second-worst downturn on record in terms of year-on-year change," said David Wilson, senior base metals analyst with Societe Generale.
The first major drop in consumption came in the mid-1970's during the oil crisis.
Aluminum for three months delivery MAL3 on the London Metal Exchange was trading around $1,975 per tonne on Friday.
Prices are down nearly 12 percent since the end of 2009, as waning confidence in the global economic recovery has spurred concerns about the lightweight metal's near-term demand outlook.
"Confidence is key for the proper functioning of aluminum demand," said Jorge Vazquez, vice president of the aluminum unit of Harbor Intelligence.
"Confidence is telling us that we should expect prices to stay either stable or down for the next three months," he said.
Morgan Stanley's Liinamaa concurred.
"As the market in general is worried about the risks ahead in the global economy and we have the typical seasonal weak period of demand just coming ahead of us, I think there is a reasonable chance that we see a little bit of softness in the near-term price," he said.
CHINA: A POSITIVE AND NEGATIVE
The impact of China's 2008 stimulus policy was still boosting the market, analysts said, with new investment in the housing sector and new railway infrastructure still earmarked to be spent.
"There is still a huge impact to come on metals consumption from Chinese government spending," Societe Generale's Wilson said.
But surging production in China, which has traditionally been a giant consumer of metals, has raised concern for the market going forward, he said.
China's production of primary aluminum rose to a record 1.416 million tonnes in May, or 3.7 percent from the prior month.
Despite China's shift back to being a net importer of primary aluminum in May, albeit at a marginal 2,800 tonnes, Wilson believed China will remain a net exporter. (Graphic: link.reuters.com/fut24m )
ETF DEMAND RESPONSE
Speculation has been growing in the market that the potential launch of a physically backed aluminum exchange traded fund (ETF) could help absorb some burdensome supply.
At 4.45 million tonnes, LME aluminum stocks MAL-STOCKS remain a major concern, Societe Generale's Wilson said.
Financing deals allow trader to take advantage of low interest rates, steepness in the forward contango, and relatively attractive warehousing rates to buy metal on warrant and lend them forward. These deals have tied up 75 percent to 80 percent of LME stocks.
"For prices to have any meaningful upward momentum we have to continue to see the stock financing and potentially the ETF absorb more and more metal," said Wilson.
Citigroup's Thurtell believed the launch of an ETF could potentially pull in between 1 and 1-1/2 million tonnes on aluminum.
"If an ETF of roughly 1 to 1-1/2 mln tonnes of ally got up, it could in the short-term increase the LME price by about $300 to $400 per tonne," he said.