Aug. 21 (Bloomberg) -- Alcoa Inc. Chief Executive Officer Klaus Kleinfeld said he's ``very optimistic'' aluminum prices will rise in the next five years as producers encounter difficulty finding enough power to meet demand for the metal.

Chinese demand for aluminum will climb again after the Beijing Olympic Games are finished and a ``strongly managed ramp- down'' of the country's industrial activity ends, Kleinfeld said yesterday in an interview in New York, where Alcoa is based. China, the world's fastest-growing major economy, will become a net importer of aluminum as use increases, he said.

Alcoa and rivals including United Co. Rusal, the world's largest aluminum producer, are battling higher prices for the electricity that powers their smelters. While those costs curtail production growth, wealthier populations in China, India, Russia and other emerging markets are driving demand for the metal used in beverage cans, cars and aircraft.

``I have not met anybody who in the long term is not assuming there will be a real issue of undersupply in the market,'' said Kleinfeld, 50. ``Energy is one of the rarest commodities. It will be very, very difficult to bring new capacity on line and even to sustain old capacity.''

Alcoa, the world's third-largest aluminum producer, estimates that demand will increase about 9 percent this year and double by 2020, requiring about 80 new smelters able to forge 400,000 metric tons each. By 2020, Asia will consume as much aluminum as the world does today, the company projects.

Power Costs

Power accounts for about a third of the cost of producing aluminum. Alcoa made an unsolicited takeover attempt last May for Canadian rival Alcan Inc., in part to capture that company's low- cost hydropower supplies in the Canadian province of Quebec. The company was instead bought by Rio Tinto Group for $38.1 billion.

Aluminum for delivery in three months on the London Metal Exchange rose $87, or 3.1 percent, to $2,850 a metric ton today. The metal has declined 16 percent from a record $3,380.15 on July 11.

Aluminum has lagged behind other metals traded on the LME. The metal had an average annual return of 15 percent in the five years through July, trailing the 35 percent average yearly gain for copper and 33 percent for lead.

Rio Tinto, the world's second-largest producer, last month scrapped a smelter project in Abu Dhabi that would have produced 700,000 tons a year after the United Arab Emirates decided not to use natural gas to fuel smelters. The company also has threatened to close a plant in Wales if it can't secure a new power contract and has suspended work on a new facility in South Africa.

Electricity Supplies

Similar problems are hampering Alcoa's efforts to maintain production. The company has idled half its capacity at a smelter in Texas in response to power shortages and is negotiating a new electricity-supply agreement for its Ferndale smelter in Washington state.

``The two big fundamental drivers are population growth'' and energy, Kleinfeld said.

Aluminum supply exceeded demand by 790,000 metric tons in the first half, compared with a shortfall in the year-earlier period, the World Bureau of Metal Statistics said yesterday in a statement. Demand last year outpaced supply by 88,000 tons in January through June, the Ware, England-based company said.

Alcoa rose 43 cents, or 1.4 percent, to $32.14 in New York Stock Exchange composite trading. The shares have declined 12 percent this year.

Chinese Demand

China's urban population rose 26 percent to 577 million from 2000 to 2006, London-based Rio Tinto has said. The country, which accounts for a third of the world's demand for the lightweight metal, accounted for more than 60 percent of the increase in primary aluminum consumption in 2007, according to Rio.

The price of aluminum, the most actively traded metal on the LME, may rise to more than $4,000 a ton as early as next year because of increasing power costs and higher production expenses in China, Rio Tinto Alcan Chief Executive Officer Dick Evans said in April.

Both Alcoa and Rio expect the market to be about balanced this year, reflecting curtailed supplies in countries including China and South Africa. Alcoa expects global demand to grow about 7.6 percent this year as rising demand from emerging markets such as China and India more than makes up for a decline of about 5 percent in the U.S. and Europe.

Alcoa said Jan. 9 it expects to add as much as 50 cents to per-share earnings in 2008 through new investments, including the expansion of the Fjardaal smelter in Iceland, which will produce about 300,000 tons of aluminum this year. The company is completing a 90,000-ton addition at the Pinjarra alumina refinery in Australia.

Alcoa is studying the feasibility of a new 250,000 metric ton-per-year aluminum smelter in Iceland that would be powered by geothermal energy. Greenland's parliament said in May it would study the potential development of a 340,000 metric ton smelter with Alcoa. The two smelters would be able to supply aluminum to either Europe or the Americas, Kleinfeld said.

To contact the reporters on this story: Dale Crofts in Chicago at dcrofts@bloomberg.net; Stewart Bailey in New York at sbailey7@bloomberg.net.

Last Updated: August 21, 2008 16:31 EDT