Aluminium prices on the London Metals Exchange (LME) averaged $1,820 a tonne in October, compared with $1,432 in 2003 and $1,350 in 2002. Spot prices have leapt above three-month contract values, as buyers reward the precious ability to offer upfront supply - backwardation is currently $5-10 a tonne, but has been as high as $70 a tonne. And nor is an immediate respite around the corner for consumers. Demand in 2005, at about 31.3 million tonnes, is likely to outstrip supply by some 500,000 tonnes, up from a 340,000-tonne deficit in 2004, according to figures from the London-based Commodities Research Unit (CRU). Consequently the average price next year is set to hit $1,732 a tonne, up from an estimated $1,708 in 2004 (see table, page 38).

The key reasons for the price spike are rampant demand, driven - like almost every globally traded commodity - by China's economic boom, and the failure of aluminium capacity increases to keep pace. World demand is expected to grow by a staggering 9 per cent in 2004 and at an annual average of 5 per cent through to the end of 2006. When global stocks fall to being able to cover only six weeks of consumption, the situation is regarded as critical. October's inventory stood at a mere 6.7 weeks, down from a 2003 average of nine weeks.

'In addition to a rise in fresh metal demand, there is increasing substitution towards aluminium away from plastics and particularly from steel, the price of which is far more volatile and has been increasing astronomically,' says Tariq Salaria, senior consultant at the CRU. Transport is driving the boom, as car manufacturers switch to lighter, more environmentally friendly vehicles and the global truck-trailer market grows strongly. Demand in the construction, packaging and foil sectors is also on the increase. Not surprisingly, in light of these key applications, the call on aluminium is closely bound up with economic cycles. With the global recovery well in train, demand growth is set to remain healthy, although the CRU assumption is that the cycle is at, or just past, its peak.

Obviously the answer is to build and expand smelters. But there is a catch. Alumina feedstock is in perilously short supply, and significant new capacity is not due on stream until the second half of 2006. In the meantime, producers are left scrambling to secure the necessary supplies at ever-increasing prices. Two tonnes of alumina are required to produce a single tonne of aluminium and the material's share in input costs has climbed to well above the typical 38 per cent mark (see figure 1). 'Alumina normally trades at about 11.5-12.5 per cent of the aluminium price,' says Salaria. 'At the moment it is at 16 per cent.'

Secure the feedstock, however, and producers can still count on a hefty margin. So, with aluminium prices high and new alumina supplies on the horizon, the number of both greenfield and brownfield projects is increasing - along with the Middle East's importance in world supply. Blessed with the key advantage of cheap gas to fuel an energy-intensive industry, eager to free itself from oil dependence, and with plentiful oil revenues to boost project spending, regional governments are investing their hopes and their cash in aluminium. Power typically accounts for about 29 per cent of input costs and, according to CRU data, Aluminium Bahrain (Alba) spends about $13 a kW h