How Much Further can Aluminum Increase?

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Non-ferrous Metals

Apart from the obvious industry boosters, most observers have been a little surprised by aluminum’s resilience during the 2nd quarter. With a massive 4.5m ton stocks in exchange warehouses and traditional markets like automotive and construction heavily depressed, few analysts could see a reason for prices to rise. However rise they have done and finally some metrics are feeding through to show why.

First and foremost consumption is up. Oh compared to May-June 2008 it’s still way down but that is almost a nonsensical comparison, the world has changed since then. But from April to May 2009 demand as measured in shipments from US and Canadian producers plus imports edged up 5.8 percent in May from April. Demand for semi-fabricated, or mill, products rose 6.8 percent in May from April according to a Reuters article quoting Aluminum Association figures.

In its breakdown of U.S. and Canadian mill products, the association said demand for aluminum sheet and plate was up 8.0 percent in May from April while shipments of extruded products jumped 10.1 percent. May shipments of aluminum ingot for castings on the other hand edged up just 3.4 percent from April. Total imports of aluminum ingot, scrap and mill products into the U.S. and Canada, minus cross-border trade, shot up 71.3 percent in April and as we will see in a moment exchange stocks are also in the process of being withdrawn suggesting semi’s metals producers are raising production. The question is how much is the long awaited re-stocking and how much is end user demand?

As we mentioned above, aluminum metal prices have been rising and some pundits are predicting a break above $1800/ton driven by a shortage of physical metal. How can you have a physical shortage of metal when there is 4.5m tons in warehouse you may ask? Well the answer is the producers have been playing the arbitrage game between spot and one year. The difference has been $150/ton so banks have bought and sold and pocketed the $150/ton. Long term storage deals and low interest rates have cut the cost of carrying for the 12 months. Of course 12 months from now a lot of metal is going to become available. Maybe of more interest is the 1.35m tons of non long term material, a significant proportion (13%) of this is now appearing as canceled warrants, according to some reports, much of it in the US. Gayle Berry, analyst at Barclays Capital thinks it could be because scrap is tight but others see it as a return of the auto market. Car makers account for about 30 percent of the global aluminum market estimated at around 37 million tons. The expectation is US auto build rates are going to increase by 1 to 1.5 million units in the third quarter spurred by the Cash for Clunkers program.

We suspect there is also an element of the supply chain, distributors in particular, seeing the rising prices and re-stocking before it goes too far. Stocks had been run down desperately far and re-stocking appears to be gathering pace.

Whatever the reason, the aluminum price is proving gravity defying when looked at in the context of world stocks and must raise questions about how far, for how long and what happens after that. Meanwhile producers will hopefully not be wound up in the euphoria and bring too much capacity back on stream, at $1800/ton many previously loss making plants begin to break even.

–Stuart Burns

Comment (1)

  1. jhenry says:

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