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Aluminum on course for rise, deficit: analyst

Keywords: Tags  Northcoast Research, Lloyd O'Carroll, aluminum prices, Midwest premium, London Metal Exchange, LME, auto body sheet, aluminum Michael Cowden

CHICAGO — Aluminum prices are set for a turnaround as production cuts and increased demand are poised to drive years of supply deficits, one industry analyst said.

Those deficits—projected to grow to 3.8 million tonnes by 2017 from 900,000 tonnes in 2014—will be spurred in large part by revved-up aluminum consumption in the automotive sector, Lloyd O’Carroll, an analyst at Cleveland-based Northcoast Research Holdings LLC, said in a report.

"Aluminum has been the most hated space (both the commodity and equities) in recent years and bears abound. We believe that view is now out of date," O’Carroll said, adding that his view was that of an "out-of-consensus bull."

Midwest premiums should fall 85.5 percent to an average of 8.3 cents in 2017 from a 2014 average of 15.4 cents, he predicted.

But the London Metal Exchange’s primary aluminum cash contract should jump 38.6 percent to $2,550 per tonne ($1.16 per pound) from $1,840 per tonne (83.5 cents per pound) over the same period, O’Carroll said. That means "all-in" prices should rise 25.5 percent to $2,734 per tonne ($1.24 per pound) in 2017 from $2,179 per tonne (98.8 cents per pound) in 2014.

At the same time, demand for aluminum auto body sheet is expected to surpass even current strong growth forecasts, O’Carroll said. In North America alone, auto body sheet shipments could surge to more than 7 billion pounds after 2025 from 200,000 pounds as recently as 2012 as the majority of light trucks and large cars in convert to aluminum bodies from steel, he added, noting that the numbers are even higher when extrusions and castings are included.

The spike in shipments should come in part due to Dearborn, Mich.-based Ford Motor Co.’s switch to aluminum in its F-150 pickup, as well the anticipated following of other light trucks, including Detroit-based General Motors Co.’s Silverado and Sierra pickups, he said.

GM didn’t respond to an April 11 request for confirmation of the predicted shift.

As auto sector demand grows, aluminum production cuts will continue, O’Carroll said. "Unless the LME price rebounds significantly, we expect to see another round of cuts by mid-’14," he said.

There also could be delays or cancellations of new projects, he said, noting that there are few in the works and one conceived today might not reach production until 2019.

But predicting exactly when demand might rise is tricky, given that up to 90 percent of metal in LME-listed warehouses is tied up in stock financing, as well as 3 million to 4 million tonnes in similar, more opaque deals outside of the LME system, O’Carroll said. That means it could take three to four years of market deficits to chew through that inventory, he added.

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