Commodities | Aug 03 2006
By Terry Hughes
Vicky Binns over at Merrill Lynch has long been flagging a peak to alumina prices due to higher Chinese production, and it seems more and more of her colleagues are beginning to agree with her.
According to the latest data, Chinese alumina production is up 51% year on year, and with that in mind, Binns expects supply side forecasts to be beaten this year.
In a recent report UBS echoed that sentiment, cutting its 2006 alumina price forecasts by 16.4% to US$498/t and 2007 by 25.8% to US$419/t, citing higher production, particularly out of China as the key reason.
Now it is Deutsche Bank that is slashing its alumina price forecasts, arguing that an increase in Chinese alumina self sufficiency will likely displace around 4.2Mt of imported alumina between 2006 and 2008.
The broker points out that back at the end of 2005, Chinese alumina capacity was around 10.7Mt, and that this has now risen a forecast 12.8Mt for 2006, rising to 15.8Mt in 2007, with a potential further 12.1Mt in capacity from 2008 and beyond.
No wonder then that Deutsche has cut its 2006 estimated average spot price by 26% to US$453/t, 2007 by 58% to US$240/t and 2008 by 61% to US$196/t.
As a result, Deutsche expects spot prices to fall below contract during 2007, and predicts this will continue for "an extended period," past 2010.
An "onerous period of market adjustment" is predicted, with production cutbacks and projects being deferred, the broker says.
However, the broker has left its aluminium price forecasts unchanged, as it doesn’t expect to see an "acceleration in smelter output above current levels." This bodes well for Alumina Ltd (AWC), which reported a 59% increase in first half profits to $259.9m.
"Aluminium demand continues to be strong in most markets worldwide and Chinese aluminium consumption continues to be the driver of global demand," a company statement today says, while reporting that every 1c/lb shift in the aluminium price affects underlying earnings by $13m.
According to the FN Arena database, Alumina is rated a Buy seven times, and a Hold three times, with an average target of $8.44, at midday the stock was trading at $6.41, up over 4% since announcing its result.