Aluminum Commodity Outlook 2011 China Potential for ETF

Aluminum prices head to in 2011 could hinge on several events, but most notably whether China restarts idled production and how strong is the appetite for new exchange-traded funds for the metal.




Base metals have rallied toward the end of the year, led by copper, but some market analysts aren?t sure how well aluminum will perform in 2011. Some see a slight retrench from current levels as supplies are ample, yet others are a little more optimistic that global growth and an ETF will boost demand.




Like many base metals, aluminum has seen its prices rise since the summer, on hopes that the global economy is finally beginning to rebound. During the summer when concerns rose that the U.S. was headed to a double-dip recession and global growth was foundering, aluminum, like many commodities tumbled. During early July prices on the London Metal Exchange fell to the $1,800 a metric ton area, but have rebounded since then. In mid-December they were around $2,300.




While prices did break, it wasn?t as sharp as some other LME base metals like zinc, lead and nickel, analysts noted. That?s because consumer demand for aluminum is still firm and stocks are being reduced.




A rebound in the automotive sector is helping to drive demand and Citigroup analysts, citing statistics from the International Aluminum Institute?s October data, noted that demand that month ran about 16% above 2009, which is where it has averaged this year.




Stocks are being whittled away because of production cut backs in China. The cut backs were part of a five-year economic plan to reign in power usage. Aluminum is a notorious energy hog and the most inefficient output was placed on hold.




But the question is: where does China go from here? The five-year economic plan ends in December and China?s leaders will draft a new five-year plan in 2011. Reuters reported in late November that details of China?s five-year energy plan won?t be published until March at the earliest. It will be part of the overall economic and social development plan created by the government when its parliament meets in an annual session.




The answer to that question will impact the supply side for aluminum, analysts said.




Outside of China aluminum production is ratcheting up. Citigroup analysts, again citing the IAI?s October data that ex-China global output increased. While it did not rise enough to offset the curbed Chinese output, it suggests a trend of higher production for 2011.




Citigroup analysts said they expect production in China will bounce back, but how much is debatable. ?We suspect that the Chinese authorities might finally get serious about how to best use the country?s energy supply, and we?re not sure that inefficient aluminum smelters will fit into that plan,? they said.




Morgan Stanley and Goldman Sachs also believe China will see production start to come back in 2011.




?We also believe that the temporary tightness in the Chinese domestic market due to energy-conservation related production cuts will be quickly reversed as we head into the new year,? Goldman Sachs said in a 2011 outlook.




How much Chinese production comes back on line will impact aluminum stocks. Although stocks have come down, Citigroup, Morgan Stanley and Goldman said overall supplies remain healthy enough compared to historical averages to limit upside price gains.




In the first three months of the year, Citigroup said aluminum prices could hold in a range of $2,250 to $2,500 a ton, not far from where they are now. ?Global aluminum stocks should continue to gradually decline, however the pace of decline probably won't be sufficient to see fresh cycle highs over that time period,? they said.




In the first three months of 2011, Goldman sees aluminum prices averaging $2,125, while Morgan Stanley has a 2011 average price of $2,200. In the six to 12-month view, Goldman sees prices around $2,200




Consulting firm Harbor Intelligence is more bullish on aluminum than other analysts, suggesting that prices could head to $2,650 before the end of February.




They base this outlook on the emerging markets, particularly in BRIC countries, continuing to see greater demand than developed markets. More importantly, Harbor analysts said they believe the downtime China has experienced will continue, rather than see production restart. They said negative economics for more than 26 months have created a structural change there as output costs ? among them energy, alumina, and anodes ? continue to rise. That will lower incentives to produce the metal, they said.




Harbor estimates that global primary aluminum demand will grow around 16%.

Harbor analysts also point out that global cash profit margins are under the historical average, while costs are rising. In China, they estimate that cash output costs were $2,443 per ton in November.




Aluminum ETF Demand To Be Watched Closely




Exchange-traded funds have been flourishing across precious metals and now base metals are starting to see their own funds start. Morgan Stanley said a sharp drop in cancelled warrants at the LME in September sparked speculation about the launch of a physically backed ETF.




Physically backed ETFs in gold and silver have added handsomely to the price of those metals and thoughts are that investors could use them as a vehicle to get exposure to base metals and as a bet on global growth.




And it?s the potential for an ETF that have Citigroup increasing it price forecasts for aluminum toward the later part of the year. Citigroup?s six to 12-month price forecast for aluminum is $2,650 a ton, which hinges on broadening economic growth ?and/or? a physically backed aluminum ETF launching.




Yet Morgan Stanley is more tempered in its assessment of any ETF. The new fund would certain attract some investors, the bank doesn?t believe the fund will change the fundamentals of the market. ?While a successful launch of physically backed aluminum ETF would, as now, have a price-tensioning impact in the short term, absolute and relative price performance over the longer term will depend on a return to a deficit market. On our current estimates, this will not be before 2012,? the bank said.

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