Why Steel Prices Will Stabilize Before Aluminum Prices

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As we have mentioned in previous articles on aluminum, world stock levels are an ever present burden that has been
depressing the price and quickly reversing any rallies. In our aluminum predictions article this week we have pointed out that stock levels are a crucial indicator of the state of the market and an important data point to track for any buyer following market trends. So it was interesting to read this article in Reuters further detail aluminum stockpiles.

The article examines stock arrivals at more remote LME warehouses that traditionally have not carried primary aluminum such as Yokohama which received 3,325 tons at the beginning of January whereas the combined deliveries to Yokohama and Nagoya had been a grand total of 625 tons over the last five years. Likewise Italian, German, Belgian and British LME warehouses have seen inflows of metal for the first time where a year ago there was nothing. Unlike the massive fire sale of metal onto warrant in Chicago and Detroit last month these lower levels of deliveries are an expression of an industry awash with metal and traders or producers unable or unwilling to finance it any longer.

Unlike the steel market, where producers have aggressively cut capacity, the Reuters article states an average 24.3% reduction in steel production from a year earlier but we have seen figures of producers averaging 50% cuts and even complete plant closures. The result is that although steel prices are continuing to fall, the rate has slowed and stock levels in the supply chain are relatively low. Contrast that with aluminum where production cuts have amounted to 8.9% from the peak in September of 2008 and you can see why stock levels are continuing to rise. Aluminum is cursed by the triple burden of:

  1. the need to gradually ramp down production capacity to avoid irreversible damage to the pot lines
  2. the fact the industry was in the midst of breakneck expansion of 12.7% from 2007 (which means new smelters are still coming on stream as others are being closed)
  3. the vast speculative stock levels that have been building up for the last few years without the wider community being aware of them

All three reasons together will ensure rising stock levels as the year unfolds and remove any hope for aluminum producers of price increases. Consumers however will benefit from lower prices for longer providing the processors, extruders, rolling mills and distributors survive. These lower prices will help fuel the wider revival in the fortunes of the housing, construction, auto and similar aluminum consuming industries so necessary to an early end to the recession.

–Stuart Burns

Comments (2)

  1. Frank says:

    I have two small scrap yards just surviving this year. Last year was incredable, does anyone think we could see that market again in the next five years

  2. stuart says:

    Hi Frank, well if your yards are handling steel we don’t expect we will see the price appreciation or demand we saw in 2006-8, anytime soon. But if your yards are handling copper the future could be better. Demand will come back although in the US not before 2010 but by that time metal prices should be firmer too. We think copper and aluminium prices are over cooked at the moment but copper does have more potential for a rising trend towards the end of 2009 and through 2010 as demand returns. Scrap has not been arising globally due to the low prices, i dont know how you are finding it in your neck of the woods but overseas consumers have turned to cathode because of a scarcity of scrap, so at least the supply chain is not clogged with masses of excess inventory.
    Thanks for posting the question.

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