Aluminum price forecasts vary widely

Bank and brokerage-based analysts generally agree that primary aluminum ingot will average $1.23/lb in world markets this year—up from the $1.16 average in 2006 on the London Metal Exchange But, there’s no consensus yet for the 2008 LME global price—with forecasts ranging from a low of $1.02 to $1.30. Most industry observers expect analysts and economists to sharpen their 2008 forecasts early in the fourth quarter when supply and demand trends come into better focus.

Why there is such a broad spread now? “It comes down to whether you feel we are heading into a U.S. slowdown that will drag global growth down with it and, hence, metal prices, or whether you are in the stronger for longer camp, in which case metal prices will hold higher longer,” says analyst William Adams of BaseMetals.com, a subscription news service, in an e-mail to Purchasing.com. “Also, Chinese exports are being curbed, which should reduce supply to the West and may even lead to some more production in China being curbed.”

Adams says he believes that “analysts will gravitate to the ‘stronger for longer’ outlook so the lower-priced forecasts will be revised higher over the next quarter and as we approach LME Week in October.” LME Week is when metals forecast seminars and a big commodity exchange dinner are held, and when some year-ahead supply contracts are negotiated.

At present, economists at Rio Tinto in London and analysts at Morgan Stanley in New York are at the high end of the range ($1.30) as both expect the bull market to continue next year. In fact, Rio Tinto, the mining company that’s buying Alcan of Montreal, expects the global demand outlook for aluminum to remain positive for the next ten years. The company expects world demand growth to be above 6% until 2011—paced by an annual average 15% growth in use in China.

A report to clients by metals consultancy Harbor Aluminum in Laredo, Texas, points out that “there was a recent aluminum price forecast poll by the Reuters News Service, consisting of 28 analysts, which showed the average price forecast for 2008 was around $1.13/lb.” More bearish, however, are the economists at Macquarie Bank of Sydney, who expect a lower price average next year ($1.10/lb) as they believe that Chinese aluminum supply growth has more than matched Chinese aluminum demand growth.

But, the most bearish to date are analysts at the J.P. Morgan Securities’ base metals desk in London and Deutsche Bank’s offices in London, who see $1.02 as the 2008 price average because of perceived explosion ahead in Chinese supply. Goldman Sachs of New York also projects that aluminum prices are set to weaken in 2008 (and probably 2009, as well) as the analysts there forecast Chinese aluminum production to increase by 35% versus Chinese aluminum demand growth increasing by 32%.