Commodities | Feb 15 2008
This story features BHP GROUP LIMITED.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
By Chris Shaw
Barclays Capital, a long time bull on aluminium has reaffirmed its positive outlook for much the same reasons as others have been turning bullish recently; demand is strong and strengthening but production is becoming more difficult given the enormous amount of power required in the metal’s smelting process.
As Barclays notes more than 40% of global aluminium smelting capacity is coal fired and with spot thermal coal prices having more than doubled to US$130 per tonne in the past six weeks the cost of producing aluminium is rapidly moving higher.
This implies prices will need to move higher in tandem, the alternative being production will fall as marginal producers start to lose money.
Add in the fact many regions, and China and Africa are the most recent examples, are struggling to generate enough power to meet their requirements not just for aluminium but for their populations in general, and we’re left with a real risk there won’t be enough low cost power to meet demand from smelters.
Assuming the situation in South Africa remains difficult in terms of power generation, and Barclays notes power company Eskom is now considering buying back power from BHP Billiton ((BHP)), it potentially puts at risk up to 3% of expected global aluminium output.
If this were to eventuate Barclays estimates it could turn the market from a likely surplus to a deficit for the year of as much as one million tonnes, so bringing down stockpiles.
The group suggests the price reaction would likely be significant, with US$4,000 per tonne and beyond possible in such an environment compared to current prices of around US$2,815 per tonne.
(See also Preparing For The Aluminium Boom, Sell&Buy-ology, 07/02/2008).
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