We Take Issue with Aluminum Market Hype

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Okay research analysts, hold your horses¦let’s not get all hot and bothered over these commodity price increases. For the second time in a week, we take issue with the analysts and media talking up the commodity markets. The other day, we read copper demand had increased in China, causing prices to increase. We don’t agree.

And not 24 hours later we read that there is substance in the price rally from an aluminum report. Some of the comments from that report, which we won’t name, suggest that the price rally is underpinned by supply-demand developments, and in particular a bounce in daily demand from China. But we believe this statement makes no sense. We have seen increased buying, not increased demand. Most of the purchases, from the SRB (China’s State Reserve Bureau) basically move metal from one pile to another to replenish stock.  No evidence suggests an increase in consumption.

The report goes on to explain another driver behind the aluminum price rally that relates to higher alumina prices. But let’s examine that point a little closer. Yes, the alumina market has now moved closer to a supply/demand balance, hence the prices have stopped falling. But, Rio, in the process of closing part of their Australian Weipa Bauxite facility and slowing expansion of their Yarwun alumina refinery suggests a different conclusion. Why would they do that if prices will increase and demand shows growth? At the same time, Rio does not see any improvement in alumina prices even after the industry had closed 12m tons of production since January!

Finally, the notion that SE Asia sees demand growth while the US no longer appears to shrink seems a bit premature. The author of the report suggests demand comes from other sectors (besides SRB stock-piling) such as automotive, construction, loan activity etc. But we have seen in China little to no upturn in retail sales or construction beyond state directed low cost housing projects and only a temporary increase in first quarter light truck and auto sales as a result of an artificial stimulus. Moreover, other economic indicators tell us power consumption and steel prices remain flat to down and the economy with its 5.8% growth rate suggests rising unemployment. In terms of the US economy, sure, the economy’s rate of contraction has slowed but to suggest that means prices will automatically move up seems rash. Prices could trade sideways for a long period of time, for example. We remain cautiously optimistic about the economy, however, as pockets of demand will appear as stimulus projects come into play.

Where will aluminum trade? Nobody knows for certain but $1300-$1600 represents where we feel the market will go between now and September.

–Lisa Reisman and Stuart Burns

Comments (9)

  1. m.emond says:

    I agree with your coments about the “talking up” of the aluminium sector. Prices have shown a small upturn over the last few weeks but if you look at global LME stocks of aluminium they continue to climb and at 3.4mt are nearly at 8.5% of global annual production, stock levesl unseen since the ealry 1980’s when the industry faced another massive glut due to the simultaneous start-up of mutiple refineries around the world. It will take several years to wean down the stocks to respectable levels, until then aluminium prices will not surge dramatically.

  2. Eddy says:

    Gentlemen,

    I disagree and think you contradict and are confused. I have read the report you refer to.

    Global aluminum demand has increased around 17% in China since Dec, given SRB stockpiling (yes), but also orders from construction, auto sector, electric grid system, packaging and re-stocking. Retail sales, auto sales, housing starts, imports of oil, copper, aluminum are at record highs (have you see the data?). Electricity output is down precisely because aluminum output is down still around 4 million tons in an annualize basis (haven you read about how electric companies are offering lower prices to smelters in order to incentive them to restart output and increase their demand of electricity?) . China clearly shows today a similar economic profile it had before the LB Bankruptcy (except to the revival of its experts given still depressed demand in the western world).

    Now, if you disagree with the refered report and think the price rally has no substance, why then you don’t see new lows and do agree entirely with their prognosis that price will range trade between $1,300-1,600 per mton?

  3. stuart says:

    Dear Eddy, thank you for your comments and opinion, even if it is misguided. We took issue with the interpretation that an increase in imports is the same as an increase in demand, clearly it is not. The metal imports purchased by the SRB and other state enterprises are going straight into store, they do not represent an increase in demand. On the issue of power consumption I dont think we can attribute the downturn in power consumption across China just to the idling of aluminium capacity, it is due to a general reduction in nearly all manufacturing. As to how much this is due to a reduction in exports and how much is due to a reduction in domestic consumption we would not like to say, if we are inclined to agree with your position on any point it is that most of the decline is probably in export industries but as this represents a large part of China’s GDP it will continue to have a depressing effect on the country’s growth for some time to come. Specifically on Aluminium we took issue with the original article’s proposition that Aluminium would reach $2000/metric ton by September this year – we can’t see that and neither I should add have any other reputable bank or broker research firms.
    Thank you anyway for your comments, it is always a pleasure to see our article generate some lively debate.

  4. eddy says:

    Stuart,

    Beyond SRB stockpiling , which again evidence clearly shows is just one factor behind the increase in demand, there is no evidence of stockpiling. All the contrary, aluminum inventories reported by the SHFE are sharply down so far this year. Can you offer evidence of oversupply or private stockpiling? In fact latest PMI data for China (March) shows inventories at manufacturing falling.

    Now you say electricity is down “due to a general reduction in nearly all manufacturing”, but you are wrong there, latest data for Industrial production (March) shows growth (not declines) just as the PMI survey from China for March also showed growth in production and new orders. Chinese falling aluminum output is intensifying not reversing, just as the data from the IAI showed today. It is the most energy intesive aluminum industry. It does helps explains the fall in electricity demand.

    Again, In my view you are missing the point because your not analyzing the data yourself but probably relying on what other analysts say. Data shows yes an uptick in imports but also in consuption (reatail sales, housing, autos, electrical, packaging).

    With respect to the refered report, their price forecast is near $2,000 per mton by the end of the year (after the period of consolidation that could last until September). The ortodox and “respected” analysts you refered were the same ones that were expecting prices above $3,000 per mton or higher for this year just last September. Those guys seem to be Bi-Polar in my view, just extrapolating the trend.

    Guys, I enjoy the discussion.

  5. EDDY says:

    Gentleman, pls read below..I think the following explanation by UBS economist can help disipate confusion on electrcity trends in CHina. I quote from an interesting article in Forbes Asia:

    “Often economists look to electric power usage as a reality check. Some have asked how China’s electricity consumption could have fallen in the first quarter of 2009 while industrial output rose, particularly as key heavy industries are power-guzzling. Power usage data is considered by some as being harder to manipulate.
    But UBS economist Tao Wang said, “people believe there is a fixed correlation between growth of electricity consumption and GDP growth, but I think that correlation is quite unstable at times, and this is one of those times.” Industrial power usage did slump less in March just as industrial output climbed much higher than expected. Services and household consumption helped prop up growth, while heavy industry was weak during the first quarter, she added. “I don’t see any real conflict between the profile for electricity production relative to usage and value-added industry data,” Fishwick said. “I think they match well enough given that they’re never going to match perfectly.”

  6. stuart says:

    Dear Eddy, I am not sure what point you are trying to make with the last entry, Ms Wang appears to be saying you cannot really make any correlation from energy figures, positive, negative or neutral?
    As to the previous point about the Aluminium price, the exact quote from the report was “We believe prices will take off toward $2,000 per mton after this period of consolidation is over, which could occur any time from today to September” so longest time frame for consolidation is September – that was the only backstop given.
    Anyway it has been an entertaining discussion Eddy, I hope you find our other material equally engaging.

  7. eddy says:

    Hi Stuart,

    Sorry for the delayed answer. The point is that you base your sketisism on underlying industrial growth in China given your observation that electricity output is down year on year. Nevertheless, as pointed above that’s not necesarily a valid point.

    With respect to the We believe prices will take off toward $2,000 per mton after this period of consolidation is over, which could occur any time from today to September the reference quoted, they meant and mean the consolidation process could last up top September and then the next upward leg toward $2,000 pe rmton will start. The idea they are trying to give is that the consolidation could last up to September. That is even clearer if one follows their reports. Up today, they have really hit it.

    Have a great weekend !

  8. Gman says:

    Look, there is 4.3 million mt of Al in LME warehouses, setting all time highs everyday. Supply and demand suggest prices should DROP. Read the news: an individual, a company, or a group of individuals [I subscribe to this notion] are financially tying up stocks in the LME creating a squeeze. Once the price moves to a point whereby all contracts clear, ‘pop’, another bubble. Be careful. Gremlins out there. Be careful!

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