Aluminum: Fourth-Quarter Outlook

NEW YORK (TheStreet) -- Aluminum is expected to advance during the fourth quarter on China's resilient demand and improving prospects in the U.S. and eurozone. Aluminum Corp of China (Chalco) (ACH), the country's largest aluminum producer, anticipates global aluminum output to rise 12% to 42.28 million tonnes this year, and consumption to grow by 20% to 41 million tonnes.

On the supply side, output in China, the world's largest aluminum producer, may take a hit as increasing electricity and raw material costs temper profit margins. As the country gears up to meet energy-saving standards, three smelters with annual production capacity of 250,000 tonnes have shut capacities, or 2% of China's 2009 output. Smelters may not bring available excess capacity on-stream on the growing pressure to limit power consumption.

During the past few months, global aluminum production stabilized at around 3.4 million tonnes per month, whereas consumption improved gradually. In July, consumption slumped nearly 6% month-over-month to 3.38 million tonnes, while production contracted by a mere 0.1% to 3.43 million tonnes. During the first seven months of 2010, aggregate production amounted to 23.78 million tonnes, while consumption was 23.31 million tonnes.

Production capacity in West Asia continues to increase as the majority of the plants are powered by the cheaper natural gas. Energy alone represents nearly a quarter of aluminum production costs and the use of gas reduces power costs. As production cost for West Asian smelters is lower than Europe, a substantial jump in prices will ramp up production, thereby capping prices. West Asian capacity is expected to reach 4.2 million tonnes by 2013, from the current 3.3 million tonnes per annum. This excess capacity will quell any rally in aluminum prices.

During the third quarter, unlike copper, LME aluminum inventory levels depleted by a marginal 1.3% to 4.37 million tonnes, while Chinese warehouses trimmed 0.4%. By end August, stockpiles at three major Japanese ports inflated by 13.4% to 236,100 tonnes. Japan imports nearly 2 million tonnes of aluminum every year.

Aluminum monthly prices are looking bullish as they are above the short-term EMAs. A candlestick pattern confirms a bullish trend for this quarter as well. In fact, the momentum oscillator relative strength index (RSI) is at 0.53 and the oscillator stochastic (9) is at 0.49, both indicating an upside potential for the metal.

Aluminum for spot delivery gained around 19.0% on the LME during the third quarter, supporting a rally in related equities. Alcoa ( AA), Kaiser Aluminum ( KALU), Century Aluminum ( CENX), Alumina ( AWC), and Chalco surged around 20.4%, 23.4%, 49.1%, 39.2%, and 32.4%, respectively.

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