Aluminum company shares expected to climb

Aluminum company shares are poised to return more than the metal they make as financial contracts mask a glut by limiting supplies and raising costs for buyers.

United Co. Rusal, the biggest producer, will climb 29 percent in Hong Kong trading and Oslo-based Norsk Hydro ASA, 27 percent, the average of as many as 18 analyst estimates shows. The projected 22 percent gain for Alcoa Inc., the largest in the U.S., would extend this year’s 0.5 percent advance, compared with aluminum’s 8.6 percent drop. The metal will gain 20 percent to $2,200 a metric ton on the London Metal Exchange in 12 months, the median of 15 analysts surveyed by Bloomberg.

Production of 45 million tons this year will exceed consumption of 44.6 million tons, while another 11.4 million is currently stored in warehouses, according to Morgan Stanley. About 65 percent of inventories is locked away in financial contracts, enough metal to supply the U.S. for two years.

“You cannot access this stuff because it’s tied up in inventory financing deals,” said Peter Richardson, chief metals economist at Morgan Stanley in Melbourne. “Given the scale of the material that’s around and the volume tied up in these deals, you are inevitably going to get a tighter market.”

Aluminum tumbled into a bear market in September and retreated another 15 percent since Sept. 30 to $1,839, as output rose to the highest ever and the global economy slowed. The LMEX (LMEX) index of six industrial metals dropped 2 percent since the end of September as the Standard & Poor’s GSCI gauge climbed 12 percent, led by crops as drought parched fields from the U.S. to Australia. The MSCI All-Country World Index of equities rose 15 percent and Treasuries returned 1.7 percent, a Bank of America Corp. index shows.

Forward Sales

Futures are in contango out to 2022, the typical relationship that means prices will rise throughout the period, data compiled by Bloomberg shows. Metal is locked in financing deals that typically involve a simultaneous purchase for nearby delivery and a forward sale for a later date. The transaction is profitable so long as the difference between the two exceeds costs including storage, insurance and debt. Investors are getting annual returns of 6 percent to 9 percent, Credit Suisse Group AG estimates.

Buyers in Europe and the U.S. are paying record premiums on top of the LME price to obtain aluminum. Rusal estimates about 65 percent of stockpiles monitored by the London Metal Exchange are in financing deals and the wait to withdraw metal from some storage depots extends to more than a year.

Premiums Outlook

Premiums in the U.S. will reach 13 cents a pound within a year and those in Europe $240 a ton, both gains of about 20 percent, according to the median of 11 estimates from analysts and traders of physical metal compiled by Bloomberg. The estimates don’t include duties in Europe. Quarterly premiums in Japan rose to a record of as much as $210 a ton in July, according to five officials with knowledge of the talks.

While locked-up stockpiles and warehouse waits are helping boost premiums, any increase in the amount of available metal may drive fees lower. Inventories in warehouses monitored by the LME rose almost sixfold to 4.9 million tons in a decade. That’s about what North America will produce this year, Credit Suisse estimates. Morgan Stanley figures the combined global reserves at 11.4 million tons.

The LME changed its rules in April to increase the minimum amount that must be delivered daily, after getting complaints about delays since at least 2009. Waits at the Dutch port of Vlissingen are as long as 56 weeks and those at Detroit 49 weeks, data compiled by Bloomberg show. Premiums may drop if the so-called load-out rates are raised again, said Nick Madden, the chief supply chain officer at Atlanta-based Novelis Inc.

‘Decent Returns’ “The premium is high, but I don’t think it’s really offsetting the low LME price,” said Vladimir Zhukov, HSBC Holdings Plc’s head of research in Moscow. “The aluminum price has to go higher for companies to start making more decent returns than they are making now.”

Rusal, based in Moscow, reported an 84 percent decline in first-quarter net income and Rio Tinto Group, the second-biggest producer, said first-half earnings at its Alcan unit dropped 93 percent. Both companies cited low aluminum prices. Aluminum accounted for about 18 percent of London-based Rio’s sales last year, data compiled by Bloomberg show.

Profit is expected to rebound next year as central banks stimulate economies and consumption expands. Global growth will rise to 3.9 percent in 2013, from 3.5 percent in 2012, according to the International Monetary Fund. China, the biggest aluminum consumer, will accelerate for at least the next three quarters, according to the median of as many as 26 economist estimates compiled by Bloomberg. Worldwide demand will rise 6.2 percent next year, from 5.2 percent, Barclays Plc predicts.