Often referred to as the light metal, aluminum is anything but that at the moment. Prices have plunged on the back of falling demand due to the widespread retrenchment of consuming industries and the realization the world is massively over stocked ” and has been for years. In reality, aluminum consumption has probably been over estimated for the last two or three years. Material has been produced by the smelters, sold, and then shipped. But all this assumes that the material had been consumed. LME stocks had risen from 644,000 tons in 2005 to 905,000 tons in 2007. But (so the story went) demand had been increasing along with oil prices and aluminum in a warehouse was seen as a rapidly rising asset. The problem was a lot of other people also saw a commodity driven by energy costs as a rapidly rising asset in a world where energy costs only appeared to be going one way. As a result, off warrant stocks held in warehouses, largely on a speculative basis, mushroomed. This went missed by the wider market. As the price has tumbled and credit harder to secure, these stocks have come back onto the visible market. With no one buying for consumption, that has largely meant the LME has taken the stocks. 100,000 tons came onto warrant in one day last month. The next day, 55,000 tons came onto warrant in Chicago alone. But the largest invisible stocks were held in China. Although the State Reserve Bureau in China started buying aluminum from domestic smelters in December with an initial 300,000 tons, the purchases may now have reached a million tons. Meanwhile it is estimated China’s smelters and traders are still sitting on an additional three million tons.
Producers have responded by cutting smelter production around the world, driven by the fact that some 60% of the world’s aluminum smelters are losing money at current prices. According to Alcoa, some 13% of the world’s production capacity has been shutdown with more likely to follow. In some cases this capacity has been closed permanently like the 30+ year old Angelsea smelter in the UK owned by Rio Tinto. For others, capacity has been mothballed and will be brought back on stream when demand and prices improve. However more needs to be closed before any inroads are made into the massive stocks around the world. Such volumes will weigh heavily on prices and even if there was an increase in construction and automotive sales ” highly unlikely before the latter part of 2009 ” the stock levels will continue to depress prices.
The price could drop to $1200/ metric ton during the 1st quarter 2009 and is unlikely to get out of a $1200-1400/ton trading range for much of this year. Standard Bank is predicting $1790/ton by the end of 2009 but to achieve that there will need to be a visible increase in demand and probably an increase in the oil price. Aluminum is seen as an oil play – when oil prices drop ” as happened last week ” the aluminum price drops, and vice versa. Standard Bank is predicting oil prices back up to $60/barrel by year end so that may be part of their evaluation for aluminum prices. Certainly when demand does begin to pick up, when stocks begin to fall and if the oil price rises significantly and assuming those mothballed smelters don’t come back on stream, the increase in prices could take aluminum above $2000 and more. But that will depend on a lot of “ifs”.
–Stuart Burns and Lisa Reisman