Aluminum’s Biggest Shutdown Since 1982 Signals Gain (Update1)

June 15 (Bloomberg) -- The biggest shutdown in aluminum production in almost three decades is signaling a 23 percent advance in prices by the end of the year. Record demand for aluminum contracts on the London Metal Exchange, combined with Citigroup Inc.’s estimates for a 5 percent decline in supplies this year, means prices will continue to rise after tumbling as much as 61 percent from a record $3,380.15 a metric ton in July. While the economy is showing signs of improving, this year’s 59 percent surge in energy costs may keep smelters off line, limiting production. “We’ve seen the bottom,” said Nick Moore, the London- based head of commodity research at RBS Global Banking & Markets. “Once the world economy picks up, it would stand to benefit,” said the analyst, who advised buying the metal in March, when prices averaged $1,374. The benchmark three-month contract was at $1,620 as of 7:43 a.m. on the LME, where there were a record 829,336 contracts outstanding as of June 4. Investors hold 10,942 options for the right to purchase aluminum at $2,000 a ton in December, the largest option position in that month. Demand for the metal is increasing as economies show signs of recovering from the first global recession since World War II. China, the biggest user, will accelerate to 7.1 percent this quarter and the U.S. will grow 0.5 percent in the third, ending four consecutive quarters of contraction, according to as many as 74 economists surveyed by Bloomberg. Rusal, Alcoa Moscow-based United Co. Rusal, the world’s largest producer, said June 2 it expects prices to improve. Alcoa Inc., the biggest in the U.S., said May 29 that distributors are showing renewed interest. Manufacturers shut smelters as slowing demand growth caused prices to drop for two years and to a seven-year low of $1,279 a metric ton on Feb. 24. Martin Iffert, a board member at Trimet Aluminium AG in Essen, Germany, spent a month reducing production last year as prices fell. Now, he says it will take Germany’s largest aluminum producer twice as long to prepare for higher output. “What we saw at the end of last year was a huge dip in demand,” said Iffert, who expects prices to reach $2,000 by December. “The whole value chain is more or less dried out of stocks, so therefore we see a stabilization in the market.” Inventories Swell Any gains may be limited because inventories in warehouses monitored by the LME reached a record 4.28 million tons on June 9. Aluminum, used in cars, cans and airplanes, is this year’s worst performer among the main metals traded on the LME, advancing 6.8 percent. Global airline losses may total $9 billion in 2009 as revenue drops 15 percent, the International Air Transport Association said June 8, almost doubling a three-month-old forecast. U.S. sales of cars and light trucks in February were the slowest since December 1981. Transport accounts for about 31 percent of aluminum demand, according to Calyon, the investment banking arm of Credit Agricole SA. U.S. home foreclosures rose 17.8 percent in May from a year earlier, according to RealtyTrac. Mortgage applications fell to the lowest since February in the week ended June 5, according to the Mortgage Bankers Association. Construction accounts for 18 percent of demand for the metal, Calyon said in September. “We can’t see the demand from the industry picking up just yet,” said Par Melander, head of commodity sales at Handelsbanken Capital Markets in Stockholm. “We have the feeling that the latest rally is mainly driven by investors.” ‘World Economy Depressed’ Goldman Sachs Group Inc. expects aluminum to fall to $1,400 a ton within three months, according to a June 3 report. “With the world economy as depressed as it is, and the large quantity of physical metal that is out there, combined with the overhang of closed production capacity, over the near- term, the outlook of aluminum is not that positive,” said Evy Hambro, who helps manage $9 billion at BlackRock Inc.’s BGF World Mining Fund in London. Aluminum reached a six-month high on June 10 as smelters curbed supply. China, the world’s largest producer, imported a record 439,900 tons in April, customs data show. Chinese industrial production expanded 8.9 percent last month, adding to signs the nation is recovering from its worst slump in almost a decade. Passenger-vehicle sales surged 47 percent in May, the most since February 2006, as government stimulus spurred consumer spending. ‘Market Tight’ “The Chinese market is tight,” said Michael Jansen, an analyst at JPMorgan Chase & Co. in London who expects prices to reach $1,800 as early as next month. “The lack of pace in which Chinese smelters are restarting is delivering an ever-larger annualized deficit.” China’s production rose to 892,000 tons in April from 883,000 tons in March, according to Beijing Antaike Information Development Co. Output was 1.19 million tons in August. Worldwide, supply will shrink at least 5 percent this year, the most since a 15 percent drop in 1982, according to Citigroup Inc. analyst David Thurtell. Barclays Capital expects output to drop by almost 2.2 million tons, or 5.5 percent, this year. “Producers are having a hard time meeting spot demand because they don’t have available inventory levels,” said Jorge Vazquez, an analyst at Loredo, Texas-based HARBOR intelligence. The consultant, which has a unit dedicated to aluminum, expects prices to reach $1,800 to $2,000 by the end of the year. The freeze in credit markets, which triggered more than $1.46 trillion of writedowns and credit losses at the world’s biggest financial institutions, has done for producers what a global agreement couldn’t achieve in 1994. ‘Significant Improvement’ That accord between the U.S., Australia, Canada, the European Union, Russia and Norway contributed to a 3 percent drop in output, according to the U.S. Geological Survey. “If you look into the third quarter, you will see a significant improvement, maybe earlier,” Artem Volynets, the director of corporate strategy at Rusal, said June 2. The $13 trillion pledged by central banks and governments around the world to prop up the financial system is showing signs of stabilizing economies. U.S. consumer confidence rose for a fourth straight month in June, the Reuters/University of Michigan preliminary index showed June 12. A Labor Department report a day earlier said fewer Americans filed for initial unemployment benefit claims. Shares of producers have already built in expectations for higher demand. Alcoa has more than doubled since early March in New York trading, outpacing the 38 percent gain in the Standard & Poor’s 500 Index. Rio Tinto Group, the London-based mining company whose aluminum business accounted for about 40 percent of sales last year, has added 71 percent. Norsk Hydro ASA, the fifth-biggest producer, rose 86 percent in Oslo trade. Distributors “know if the green shoots turn over to become demand, they will not be able to supply,” Klaus Kleinfeld, chief executive officer of New York-based Alcoa, said May 29.