The global aluminum market caught a midyear updraft in prices that is expected to continue this year as critical end markets such as transportation and housing improve.
Aluminum prices have increased 38% since July, which has boosted sales levels and likely buoyed the performances of aluminum makers including Alcoa Inc. -- which reports after the market's close Monday, kicking off the fourth-quarter and year-end earnings season -- as well as Rio Tinto and Russia's UC Rusal.
The price increase for aluminum, which is used in a broad array of products and is considered a key indicator of industrial demand, reflects stronger end markets as well as production cutbacks, mainly in China.
New housing starts and automobile and aerospace sales are showing signs of strengthening globally, analysts said, especially in the U.S., the world's second-largest consumer of aluminum. Economists say housing starts are likely to rise 17% this year, compared with a 7.3% increase in 2010. Car sales, which rose 11% last year, are expected to climb 12% in 2011.
Barclays Capital Equity Research expects 2011 aluminum consumption to grow 8.1%, compared with 7.9% in 2010.
'The aluminum market will improve,' said Edward Meir, a metals analyst with MFGlobal.
Aluminum prices are hovering around $2,400 to $2,500 a metric ton. Analysts expect the price to rise to $2,700 a metric ton in 2011. While Alcoa, UC Rusal and Rio Tinto all benefit from increasing aluminum prices, much of the companies' sales are already contracted, and it can take months for the higher prices to be figured into current sales and profits.
The industry's momentum could also be derailed by two factors. Making aluminum requires huge amounts of energy, and rising energy costs could erode aluminum profits.
In addition, if producers boost output to capitalize on rising prices, more aluminum on the market would likely depress prices.
But Leo Larkin, a metals and mining analyst with Standard and Poor's, says the three top aluminum companies account for about 48% of global output, which should help keep supply in line with demand.
'With a greater degree of concentration, we think the restart of idle capacity in response to stronger market conditions should be more rational,' he said.
A wild card is China, the world's largest aluminum consumer, which usually produces about 16 million metric tons yearly. It has shut down some smelters to cut pollution and energy consumption, reducing output by 1.3 million metric tons.
Market observers are unclear how long those aluminum smelters will stay off line. Much of the country's aluminum is produced at small and midsize smelters that are major employers in their regions. If those smelters stay offline for an extended period of time, pressure may mount for them to reopen.
