Overcapacity in the aluminum market has been a huge problem for the likes of Alcoa (NYSE:AA), Century Aluminum (NASDAQ:CENX), and Rusal. Indeed, except for 2011, when the China-led commodity boom boosted industrial metal prices, including aluminum, prices over the years have been under tremendous pressure due to global supply consistently outstripping demand. But on Monday, aluminum prices hit a nine-month high and are now inching toward $2,000 a ton. So what is finally driving up aluminum prices?

Aluminum prices jump
In order to shore up aluminum prices, global aluminum giants such as Alcoa, Rio Tinto (NYSE:RIO) and Rusal have been slashing their output since mid-2013. Production cuts created a deficit of 726,000 metric tons last year; nonetheless, aluminum prices still fell 17%.

Aluminum prices had witnessed a downward trend since January 2013 as the market remained very much fundamentally imbalanced. Despite production cuts by European and American smelters, prices remained soft as there was enough stockpile of the metal accumulated over the years.

Moreover, thanks to lower manufacturing costs, aluminum smelters in China and the Persian Gulf have continued to maintain record production, which in turn has offset lower productions by western smelters.

Even though aluminum producers such as Alcoa have been seeing strong performance in their value-added business thanks to strong demand from auto and aerospace industries, weak aluminum prices have been hurting their upstream business. But it seems that aluminum prices are finally gaining some momentum. On Monday, aluminum prices hit a nine-month high of $1,913 a ton. Prices are now close to the $2,000 ton mark, a level required for many smelters to remain profitable.

Prices have rebounded as there is growing feeling that Indonesia's export ban on mineral ores will create a tremendous shortage of bauxite -- a clay-like soil which is transformed into alumina before eventually getting converted into aluminum.

Indonesia's exports ban
Earlier in January, Indonesia placed an export ban on its mineral ores. The country wants its manufacturers to shift toward value addition. Experts are now divided over whether the Southeast Asian country will lift the ban. While in some quarters it is believed that the ban will be a permanent one, others think that the Indonesian government might relax its existing rules on some minerals. Whatever the government decides, the export ban has already had an impact on some metals. Indeed, nickel prices, which were hammered in 2013, have climbed about 30% year to date following Indonesia's ban on mineral exports

Why the world's biggest aluminum producer risks running into shortage
The Financial Times, citing CRU, notes that Indonesia accounted for about six-tenths of total global bauxite supplies between 2007 and 2013. In 2013, China acquired about two-thirds of its bauxite supplies from Indonesia. But this year China will not be able to obtain any bauxite from Indonesia due to the export ban on mineral ores.

Up until last month, aluminum prices remained fairly stable as China, anticipating an export ban, started stockpiling bauxite from the beginning of last year. Besides, it also imported from other sources, such as Australia and India. China's bauxite imports surged about 80% while inventories rose to between 12 and 18 months of consumption last year.

But China hasn't been able to obtain any bauxite this year. And that is worrisome. China, which accounts for the bulk of Indonesian bauxite imports, will exhaust its stockpile sooner rather than later.

With no reliable bauxite supplier for China both in terms of scale and quality, aluminum prices could jump in the mid to long term.

Moreover, China's attempt to substitute its imports is also likely to push the cost of producing aluminum. For example, the cost of importing bauxite at Chinese ports from locations other than Indonesia has jumped from about $40 in 2013 to $60 this year, according to CRU. 

Jump in prices strengthens Alcoa's bullish case
It seems that the aluminum market is finally feeling the impact of Indonesia's export ban as evidenced by Monday's surge. Russia's Rusal expects the price to hit the $2,000 per ton mark in the coming months. This would be an excellent development for Alcoa, which has already been strengthening its upstream business. I have been bullish on Alcoa for a while, mainly due to the company's robust value-added businesses. The latest development in the aluminum market, which has boosted prices, has further strengthened my bullish case.