Not surprisingly, we widely hold that lower metal prices are good for just about everyone, provided that, in the long run, producers can still turn a profit and the industry continues to invest. But the precipitous fall in prices over the last half year, though welcome to consumers has caused mayhem among distributors as falling prices mean stock cannot be sold except at a loss. Distributors then stop buying and the supply chain becomes starved. Massive inventories of primary metal build up as primary producers cannot find customers to turn their ingot into bar, sheet, sections and tubular products. This is exactly what has been happening to the aluminum industry.
As we reported earlier this month there was concern among distributors that China was going to remove the 15% export tax on primary aluminum they imposed at the beginning of this year to dissuade production of more basic products and encourage more value add exports. This would have led to a surge of primary metal exports and further heavy falls in ingot prices. As primary metal prices fall the value of semi finished products moves down with it and this concern (along with poor demand) is what has led to the de-stocking in the supply chain and exacerbated the drop in demand back all the way on through to the primary producers. Some distributors had seen a possible floor to the price curve in the mid $1400’s before the risk of major Chinese sales. But according to a Standard Bank report, the Ministry of Finance has just made a surprise announcement they will not be lifting the 15% export tax on January 1st and the LME price promptly bounced on Friday from a 5-year low of $1,431 to eventually close at $1,495/mt.
What the market desperately needs, more than lower prices, higher prices or a rapid rise in demand is first and foremost some stability. If distributors and consumers can see some stability come back into the market it will be the first step in rebuilding confidence and a willingness to take risks such as laying down stock. Though the Chinese decision will not in and of itself turn the market around (there are still over 2m tons of primary metal inventory on warrant according to Reuters and possibly as much again off warrant), it is at least a step in the right direction.