Aluminium to shine on mergers, takeovers

Aluminum, the worst performer on the London Metal Exchange (LME) since 2002, has the best chance to advance for at least the next six months.

A growing number of investors say takeovers of Alcan of Canada and Russia's OAO Sual Group may reduce aluminium production as China, the world's largest supplier, cuts exports.

Aluminium will be the only metal on the LME to gain for the rest of 2007, while copper, nickel, zinc and tin decline, futures markets show.

United Co. Rusal, the Russian aluminum company controlled by billionaire Oleg Deripaska, expects the metal to appreciate 50 per cent to $4,000 a metric ton as early as next year. Prices will probably rise through 2010, say Deutsche Bank, UBS and JP Morgan Chase, increasing profit for miners BHP Billiton and Alcoa and hurting consumers, such as Boeing and bottlers for Coca-Cola.

"Aluminum futures are the best place to park your money,'' said Jon Bergtheil, head of global metals strategy at JPMorgan in London. "Copper and nickel have more downside potential than aluminum.''

Aluminum for immediate delivery in the so-called cash market is selling for $2,675.80 a metric ton, and futures contracts indicate that prices will reach $2,756 in February. Copper, now at $7,678 a ton, will decline to about $7,350 while nickel will slide from $36,315 to $35,420 on the LME.

Benchmark aluminum for delivery in three months on the LME was at $2,732 a ton today.

Rising energy costs threaten to drive up prices because aluminum production consumes 15 megawatts of power for each ton, equal to 370 euros ($501) for the typical smelter plant in Germany.

Power to be delivered in 2010 now sells for 55 euros a megawatt-hour, or 825 euros a ton of aluminum, according to prices from broker GFI. Metals prices will keep pace or manufacturers may shut smelters to save money.

"There hasn't been investment in the industry over the past two decades, and the world will pay the price for that,'' says Jim Rogers, the chairman of New York-based Beeland Interests and author of 'Hot Commodities'. "It has much higher energy costs compared with the other base metals, and as plants are taken off stream because of rising costs, we will see a tightening in supply.''

Aluminum also is buoyed by the prospect of the biggest producers wielding more power than OPEC does in the oil market.

Alcoa's hostile $28 billion bid for Alcan may result in the world's five largest aluminum producers controlling 54 per cent of world supply, compared with 43 per cent a year ago. By comparison, the 12-member Organization of Petroleum Exporting Countries pumps 41 per cent of the world's oil.

Alcoa, Rusal, BHP Billiton and the rest of the industry sell about $85 billion of aluminum a year to makers of beer cans, airplanes, window frames and car parts. Higher prices may hurt profits at companies ranging from Pepsi-Cola Bottling to Airbus SAS to Ford Motor.

"Alcoa and Alcan getting together, that's probably the key issue for the commodity right now,'' says Tom Williams, the head of purchasing for Airbus in Toulouse, France. "We want to be sure that whatever happens we still end up with a sensible competitive environment at the end of it.'' The average airplane is 80 percent aluminum.

Alcoa wants Montreal-based Alcan so it can expand capacity to meet a doubling of demand by 2020, according to spokesman Kevin Lowery. This year, production will outstrip demand by 576,000 tons, according to CRU, a London-based metals consultant.

The takeover "will bring the strength of two companies to bear to make sure we can elevate what we do for our customers,'' said Lowery. Alcoa, based in New York, is prepared to sell assets to resolve antitrust issues, he said.

Aluminum is cheap, relative to every other metal on the LME, the result of production in China. The metal has increased on average 14 per cent a year for the past five years, compared with 26 per cent for tin and 42 per cent for lead.

The price of aluminum will rise next year to $3,086 a ton, or $1.40 a pound, up from an earlier forecast of $1.30 a pound, according to Dan Brebner at UBS in London, because of raw material and energy costs. Aluminum has averaged $2,774 a ton so far this year.

"In 2008, it looks like aluminum could outperform the other metals,'' says Brebner, executive director of commodities research.

China's decision on June 19 to rein-in production by removing a tax rebate on shipments of aluminum rods and bars may result in the country importing more aluminum than it exports by 2009, said Michael Widmer, head of metals research at Calyon in London. "That should be a big support for prices,'' he said.

Demand for aluminum in China, which is also the world's largest consumer of the metal, will grow 20 per cent this year, outstripping the rise in domestic production, Deutsche Bank said in a June 22 report. Investors who followed Deutsche Bank's advice to buy aluminum in April 2005 earned 49 per cent profit in 16 months.

The average person in China uses 10 kilograms of aluminum a year, and the average Russian 5 kilograms, compared with 34 for the typical American and more than 50 for a German, according to Rusal estimates.

Charts tracking aluminum for delivery 63 months from now show the greatest demand after 2008. The price for the December 2010 contract gained 9.5 per cent to $2,410 a ton as of June 22, while the most widely traded three-month contract has lost 1.8 per cent during the same period.

"The far forward fund buying is significant,'' says Mo Ahmadzadeh, president of metals trading at Mitsui Bussan Commodities in New York.

Rusal, created this year through the merger of OAO Russian Aluminium, OAO Sual Group and the alumina unit of Glencore International, is anticipating a surge in demand. The company plans to expand three plants and build two more as soon as 2012.

Chief Executive Officer Alexander Bulygin said in March that aluminum may reach $4,000 a ton as early as next year.

Aluminum has a "very favorable long-term outlook,'' Artem Volynets, Rusal's head of strategy, said in a June 29 interview in which he declined to give a specific forecast. "We expect to see a very interesting picture when China shifts into the importer position.''

Prices also are helped by a slowdown in smelter construction. Aluminum Corp. of Bahrain is facing a natural gas shortage that may scuttle a plan to increase annual capacity to 1.2 million tons. Alba, as the company is known, is trying to buy gas from Qatar to supply its factory.

"If you look past the next five years, some people see very little downside because they believe there will be less supply and the cost of producing this commodity will only go up,'' says Adam Rowley, an analyst at Macquarie Bank in London. Increasing energy demand worldwide means "there is less need to sell it cheaply to smelters.''