Aluminum May Gain on Tight Supply, Citigroup Says

Aluminum prices will rebound in the next year as supplies tighten and investor demand increases, according to analysts from Citigroup Inc., Morgan Stanley and Societe Generale SA.

The metal, used in cars and construction materials, will reach $2,500 a metric ton next year, Citigroup’s David Thurtell said today at a conference in Chicago. The price yesterday closed at $1,961 on the London Metal Exchange. Morgan Stanley’s Mark Liinamaa said the metal may gain to $2,200 by yearend, and David Wilson at Societe Generale forecast $2,295 in 2011.

As much as 80 percent of inventories monitored by the LME are tied up by investors, making the supplies inaccessible to manufacturers and parts makers, Wilson said in Chicago. New exchange-traded funds backed by the metal may take up 1 million tons this year, Thurtell said.

“Prices have to move higher,” Morgan Stanley’s Liinamaa said at the annual Harbor Intelligence aluminum outlook conference. “We are optimistic about the longer-term demand prospects.”

Before today, aluminum was down 12 percent this year. As much as 70 percent of smelters are unprofitable and vulnerable to production cuts, Oleg Deripaska, the chief executive officer of United Co. Rusal, the world’s largest producer, said in an interview this month. Carlos Ghosn, CEO of Renault SA and Nissan Motor Corp., has said global car production will gain to a record this year.

Long, Steady Climb

“We see a long, steady climb for aluminum,” said Andrew Karsh, who helps manage $4.8 billion for the Credit Suisse Total Commodity Return Strategy team in New York. “We’ve been having a reactionary market instead of one that is driven by the fundamentals. The fundamentals are still strong.”

Aluminum for delivery in three months rose 0.1 percent to $1,963 a ton at 6:29 p.m. in London. The metal, down 16 percent from March 31, is headed for a third straight monthly decline.

Traders will shift their focus on the prospect for tighter supply, after Europe’s debt crisis this year elevated investor concern over demand, Morgan Stanley’s Liinamaa said. The recent slump has the left the price about 7 percent below the marginal cost of production, which is “unsustainable,” he said.

Inventories that are near record levels do not signal “a wave of metal” is available, mostly because so much is held by investors or tied up in financial arrangements, Liinamaa said. LME stockpiles are at 4.46 million tons, five times the average since 1980 and more than Europe makes in a year.

Investor Demand

The possible introduction of a physically-backed ETF will add to demand from investors, which has grown “spectacularly,” since 2002, Citigroup’s Thurtell said. Rusal has said it’s in talks to supply metal to banks for the possible funds.

“We’re interested in supporting new channels of demand for the metal,” Oleg Mukhamedshin, Rusal’s deputy chief executive officer and head of capital markets, said in an interview on April 21.

Still, gains for aluminum will lag behind other base metals as production “surges” 9.5 percent this year, said Societe Generale’s Wilson, who doesn’t expect “significant” output cuts even as some producers remain unprofitable.

“Smelters will generally absorb negative margins for some time,” Wilson said. “The work involved in shutting down smelters is very intensive. We are not going to see a pullback in production any time soon.”