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Aluminum Prices Set to Rally

Written by Luke Burgess
Posted August 30, 2005

When I was in high school I worked part time for my father who owned a sheet metal fabrication shop. It was pretty good work. I got to work with my hands and I picked up some skills, like welding.

During this experience I learned about several different metals. And I have to tell you that one of the most interesting metals is Aluminum. Although aluminum is fairly hard to weld, I enjoyed working with it. Aluminum is as light as plastic but just as strong as most other metals. Plus when it's polished it looks real nice.

Working with aluminum at the shop did have its downside. The price of the metal was twice as much as the regular cold-rolled steel that we used generally. That meant that there was little room for error.

And if you knew my father you'd know that he has to be one of the cheapest men to ever grace the Earth. (Although I think I come a close second.) So messing up a job that required aluminum usually meant the nose to the grind stone.

But it looks as if aluminum prices are going to go even higher.

Aluminum prices have lagged gains since 2002. But many analysts believe that the metal may outperform both copper and nickel in the coming months.

You see demand for aluminum is outpacing production while inventories are shrinking. Aluminum inventories monitored by metals exchanges in NewYork and London will fall by two-thirds by the end of next year, reducing supplies to the equivalent of 3.5 days of demand from 10.2 days now. Similar supply reductions helped copper and nickel prices double since 2002.

And as the metal rallies, so will shares of the biggest producers, Alcoa Inc and Alcan Inc

Demand for all metals has jumped partly because economic explosion in China which has boosted the demand for buildings, cars and appliances.

At last look September futures were over 87 cents/lb, up 39% since the end of 2002.

According to Merrill Lynch, aluminum will average 90 cents/lb next year and 86 cents in 2007, compared with about 84 US cents so far this year.

So will this be the year of aluminum? I know that produces like Alcoa and Alcan are crossing there fingers.

- Luke Burgess

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