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Stock Strategist Industry Reports

Could Excess Supply Foil Aluminum Prices in 2011?

Improving fundamentals have momentum, but the surge in pricing might not last.

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Aluminum has been the least preferred metal among equity investors given its high inventory levels, dependence on energy prices, and excess-supply situation. Aluminum prices remain 25% below their prerecession peak at nearly $2,500 per metric ton while prices for copper and tin are at record highs. We believe the long-term fundamentals of aluminum are sound given its attractive properties, widespread usage, and consumption patterns for countries entering high-growth stages of economic development. However, we think aluminum prices could be challenged in the near term due to an oversupply problem unlikely to recede in the next couple of years.

Geography Plays a Key Role in Cost Structure
The largest costs in producing aluminum are its primary raw material alumina (which is essentially refined bauxite ore) and energy (as a significant amount of electricity is needed to run an aluminum smelter).

Bridget Freas does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.