There is an interesting debate going on in the aluminum world that is quite probably being mirrored across other metals categories, namely – which way will the price for semi finished metals go the balance of this year? Aluminum semis prices are driven largely by the ingot price but also by the premium mills can charge for the particular product ” plate, bar, flat rolled, sections, foil, etc.
First, the ingot price.
There is the demand camp who say China’s demand will reach 14.9 million tons this year. This represents a 24% jump this year over last year. That China is the world’s largest maker and consumer of aluminum and will likely consume 35% of world demand by 2020 from just 13% in 2000, only adds fuel to the fire. Faced with such growth projections, a slow down in mature western markets will barely dent primary metal demand this year or next.
Then there is the fundamentals camp who say stocks of ingot have risen this year in the face of slowing western demand. In addition to weak demand outside of China, high energy and alumina costs will prevent producers from dropping prices to stimulate demand. So don’t expect prices to drop even if stocks continue to rise. Where stocks have risen it has been in North America where demand has dropped the most this year.
Then there is the it’s all speculative camp who claim that all the money flowing into oil and metals is an anti dollar inflation hedge and this will continue until such time as the dollar’s slide turns around. This is unlikely in the short term, with a weakening economy and rising inflation the Fed has increasingly limited room to influence the dollar.
So what’s our take? Our feel comes from being closer to the ground. What is happening in manufacturing and distribution companies operating in today’s market? We see demand for aluminum semis as firm in Europe, steady in the US and still strong in Asia. We see China’s economy cooling this year, the process has already started. Mill lead times have come down a little in China and largely due to changes in export duties the import/export market has reduced considerably. Though China’s growth may be easing, it’s still strong, from 12% growth last year to 8% this year sounds huge, 8% still requires over a million tons of additional material supply this year from last. Western mills semi finished products order books are still strong, price premiums are holding up well for most semi finished products and demand remains firm. There is weakness in some markets. Southern Europe and some industries in the USA but we expect the raw material and energy input costs are going to prevent mills from responding with lower prices.
So we don’t see prices coming off. There are many new production projects in development but they take time to come to capacity. Meanwhile, hiccups like this year’s storms in China and South Africa lose hundreds of thousands of tons of production. The probability is we will have to live with at least the price levels we have today for the rest of this year and beyond.