Aluminium supplies will struggle to meet surging global demand over the next decade, leading to price rises, according to the head of Alcoa, the world’s largest producer of the metal.
The aluminium market is well supplied this year but Klaus Kleinfeld, chief executive of Pittsburgh-based Alcoa, says that eventually “people will want aluminium and they will find they cannot get enough of it”.
Along with other metals and mining companies, Alcoa’s shares have fallen this week because of concerns about a slowdown in China, which accounts for about 40 per cent of world aluminium demand.
At $13.05 on Wednesday, the shares have lost about 20 per cent of their value since the start of the year.
Mr Kleinfeld, however, says the company’s long-term prospects are bright. Speaking to the Financial Times, he argues that the balance of supply and demand would shift in favour of producers.
Echoing the views of Eiji Hayashida, chief executive of JFE Steel of Japan, who suggested recently that steel production was likely to reach a plateau over the next five years, Mr Kleinfeld suggests supply constraints would restrict aluminium output.
“The demand is going to be there, because the things driving demand are very hard to stop,” he says. “The real question is whether there will be enough projects to meet that demand.”
The price of aluminium has recovered strongly in the past 18 months but has still lagged behind other metals. At $2,250 a tonne for delivery three months ahead, it is up 75 per cent from its low point in February last year, but is only 67 per cent of its record high in July 2008. It has fallen 10 per cent since last week.
Physical stocks are high, and there is substantial unused production capacity in America and Europe, with significant new capacity set to come on stream in Asia and the Middle East. This additional capacity will include the Qatalum plant in Qatar, now ramping up, and Alcoa’s own Ma’aden project in Saudi Arabia, due to start up in 2013.
Demand for aluminium is driven by use in growth industries such as aerospace, and characteristics such as light weight and recyclability make it increasingly attractive for use in cars and consumer electronics.
Over the past 20 years, aluminium demand grew an average 3.4 per cent a year, made up of 15 per cent annual growth in China and 1 per cent in the rest of the world. Alcoa believes that over the next decade, even with slower demand in China, global demand can grow 6.5 per cent per year, doubling total use by 2020.
Mr Kleinfeld says that, while supply has easily kept pace with demand until now, that may not be the case in the future.
“The world will need every single one of those new plants that are coming on stream over the next few years,” he says.
Later in the decade, he adds, it is likely to be increasingly difficult to find new high-quality mines to produce bauxite – aluminium ore – and sites for new refineries and smelters.
“The constraint will not be capital – the money will be there – but the availability of these high-quality assets,” he says.
Energy supplies will be a key issue: electricity typically accounts for about 40 per cent of aluminium production costs. If energy markets tighten, so will aluminium.
China’s government has already signalled that it wants to curb aluminium production, which accounts for 6 per cent of the country’s entire electricity use.
Tony Robson, an analyst at BMO, says the question is how long Alcoa has to wait for those expected supply constraints to bite.
“Klaus Kleinfeld may well be right that in the long term the aluminium market will be tight. But it is also true that over the next three years or so it is going to remain well supplied,” he says.
“For most investors, believing in anything more than three years ahead is a leap of faith.”
Copyright The Financial Times Limited 2011.