FACTS ‘N’ FIGURES — Bullish future for aluminum

The most important feature of the aluminum market during recent months has been the rapid drawdown of the visible exchange and producer-held stocks. The decline has been supported by a strong recovery in demand for aluminum products over the first half of 1997.

Given the position of lower inventories and an improved outlook for demand, it is surprising that prices are not higher than they are.

The restraint on prices relates to the level of unreported stocks rumored to have been built up in recent months, overstocking activity within downstream industries and the idled capacity that overhangs the market. Nevertheless, in our opinion, the outlook for the metal remains strong and we believe prices will move gradually higher during the second half of the year.

In 1998 and 1999, an increasingly large metal deficit will create bull market conditions during which time we expect prices to be pushed considerably higher. For 1997, we are forecasting an average spot price of US$1,620 per tonne, rising to US$1,800 per tonne in 1998 and US$2,250 in 1999.

We expect Western World consumption in 1997 to increase by 4.6%, to 18.3 million tonnes, as some of the lost ground of 1995 and 1996 is regained. For the years 1998 to 2000, we are forecasting that the growth rate from 1997 levels will slow as the destocking cycle comes into play and with the recognition that the current economic cycle, which is more than six years old, is unlikely to continue indefinitely.

Western World production appears to be increasing at a much more gradual pace than was noted last year. The output rate is likely to be boosted in the second half of the year as some new capacity is brought on-stream and some recent expansions continue to make progress towards full utilization rates.

Western World production is likely to increase by 3.8%, to 16.1 million tonnes. In 1998, we expect output to increase by 5.1% as a result of projects started this year.

As less new capacity is evident in ensuing years, we expect an increase in output of 3% and 3.1% in the years 1999 and 2000, during which period a supply bottleneck is likely to emerge.

We predict that strong bull market conditions will not occur until 1998, though we do expect prices to track gradually higher over the remainder of the current year. We are forecasting a metal deficit of 230,000 tonnes during 1997 and increasing deficits over 1998 and 1999, when prices are expected to reflect the more bullish market conditions.

Although supply is expected to increase over 1997 and 1998, there is a shortage of new capacity scheduled to come on-stream in ensuing years. This factor will add momentum to the bull market conditions expected at the end of 1998 and into 1999. The demand environment should be positive then, and higher prices would undoubtedly lead to other smelter projects.

Prices are unlikely to surge ahead in 1997, though we are forecasting a gradual increase over the remainder of the year. In summary, prices should be supported over the period by:

n a steady downtrend in the highly visible London Metal Exchange stockpile, combined with a reduced producer-held inventory stockpile;

n expectations of future market conditions, with supply expected to tighten in 1998;

n the funds, which are likely to act in advance of the above-noted point and boost prices ahead of any market tightness; and

n a large market deficit that will develop in 1998 and 1999 and which should culminate in prices peaking during these years under bull market conditions.

We forecast prices to peak at more than US$2,300 per tonne in 1999.

— From a report released by Metals Bulletin Research, a London-based metals consultancy.