Aluminum to Beat Copper, Zinc, Tin as Takeovers Squeeze Supply

July 2 -- Aluminum, the worst performer on the London Metal Exchange since 2002, has the best chance to advance for at least the next six months.

A growing number of investors say takeovers of Alcan Inc. of Canada and Russia's OAO Sual Group may reduce aluminum production as China, the world's largest supplier, cuts exports. Aluminum 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 percent to $4,000 a metric ton as early as next year. Prices will probably rise through 2010, say Deutsche Bank AG, UBS AG and JPMorgan Chase & Co., increasing profit for miners BHP Billiton Ltd. and Alcoa Inc. and hurting consumers, such as Boeing Co. and bottlers for Coca-Cola Co.

"Aluminum futures are the best place to park your money," says 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.

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.

`World Will Pay'

"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 Inc. 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 percent of world supply, compared with 43 percent a year ago. By comparison, the 12-member Organization of Petroleum Exporting Countries pumps 41 percent 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 Co. to Airbus SAS to Ford Motor Co.

Airbus Concern

"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," says Lowery. Alcoa, based in New York, is prepared to sell assets to resolve antitrust issues, he said.

China's Exports

Aluminum is cheap relative to every other metal on the LME, the result of production in China. The metal has increased on average 14 percent a year for the past five years, c