Aluminum May Gain 29% on Copper-Substitute Demand

Aluminum may advance as much as 29 percent to $3,000 a metric ton next year as record copper prices spur end-users to use the light metal as an alternative, said a partner at Tokyo-based research company Market Risk Advisory.

Substitution will boost global demand by 6.9 percent to 40.1 million tons in 2011 from this year, narrowing a worldwide surplus to 200,000 tons from 1 million tons, Naohiro Niimura said in an interview in Tokyo yesterday. Demand is forecast to surpass production by 300,000 tons in 2012, creating a global shortage for the first time in six years, he said.

Copper climbed to a record $9,267.50 a ton on Dec. 14 and has gained 22 percent this year as China-led demand outpaces supply. Aluminum has retreated about 7.5 percent from a two-year high of $2,500 a ton on Nov. 11. The widening price gap encourages companies such as Japanese cable maker Furukawa Electric Co. to increase aluminum consumption.

“Aluminum will likely benefit from copper’s rally as substitution may accelerate,” said Niimura, who worked about 10 years in commodity derivative sales at Mizuho Financial Group’s Mizuho Corporate Bank, Barclays Capital and Deutsche Securities before starting his company this year.

Furukawa Electric plans to produce aluminum wire harnesses in Southeast Asia for Japanese carmakers in the year beginning April, spokesman Masahiko Fukumoto said. The new product, more than 40 percent lighter than copper-based wire harnesses, will increase fuel-efficiency, he said by phone yesterday.

Shipments of aluminum wires increased 48 percent on year to 42,900 tons in the year ended March 31, while shipments of copper-based products fell 13 percent to 662,500 tons, according to the Japanese Electric Wire & Cable Makers’ Association.

China Demand

Global aluminum demand is forecast to increase 6.2 percent to 42.6 million tons in 2012, exceeding expected output of 42.3 million tons, according to Niimura. The market has had a surplus since 2007 on capacity expansion by smelters in China, Russia and the Middle East.

Aluminum output in China, the world’s largest producer, is expected to grow 8 percent to 14.8 million tons in 2011 from this year, falling short of demand estimated at 15.9 million tons, Niimura said. Chinese smelters will have difficulty catching up with domestic demand as the government restricts electricity supply to the energy-intensive industry.

Growth in Chinese demand may be curbed next year if the government tightens its monetary policy to curb inflation, Niimura said. The Chinese central bank has raised rates once since December 2007, pushing the benchmark one-year deposit rate to 2.5 percent and the lending rate to 5.56 percent. Next year the bank may increase rates gradually by a total of 1 percentage point, he said. Consumer prices jumped 5.1 percent in November.

ETF Influence

Aluminum demand will also increase next year as exchange- traded funds backed by the metal are expected to become available to investors, Niimura said.

United Co. Rusal, the world’s biggest producer, said the possible launch of aluminum exchange-traded funds in 2011 may lock 2 to 3 million tons of the metal for “several years,” according to a statement filed to the Hong Kong stock exchange.

Alcoa Inc., the largest U.S. aluminum producer, supports the creation of an exchange-traded fund backed by the metal and would be interested in supplying aluminum for such a product, Chief Executive Officer Klaus Kleinfeld said last month.

Copper for three-month delivery in London may advance to as high as $11,000 a ton next year as global consumption is expected to outpace output by 300,000 tons, led by Chinese infrastructure building and auto demand, Niimura said.

Global copper demand is expected to grow 4.8 percent to 19.5 million tons next year, while production is forecast to increase 2.1 percent to 19.2 million, Niimura said.

The deficit may narrow to 200,000 tons in 2012 as production is forecast to increase 5.2 percent, faster than the 4.6 percent growth in consumption, he said.

Aluminum for three-month delivery on the London Metal Exchange traded at $2,313 a ton at 5:04 p.m. in Tokyo.

To contact the reporter on this story: Aya Takada in Tokyo at atakada2@bloomberg.net Yasumasa Song in Tokyo at ysong9@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

Dec. 13 (Bloomberg) -- John Stephenson, a fund manager at First Asset Investment Management Inc., talks about the outlook for commodities including copper, gold, corn and crude oil. He talks with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)