Aluminum Holding up as Physical Supply is Tighter than Massive Stocks Suggest

There is no question that the 4.5m tons of aluminum sitting in LME warehouses is restricting the metals upside. The fact that much of this metal (and less visible stocks sitting in trade warehouses of another 1-1.5m tons) is tied up in long term finance deals doesn’t negate the fact the market has been in surplus even as consumption has risen. According to a Reuters article, primary aluminum consumption is running at 38.3m tons about the same as September 2008 and more than 20% above the 30m ton rate of early 2009. China is certainly leading the charge but consumption in India, Brazil and other emerging markets is also picking up and so finally is demand in the United States, western Europe and Japan as Alcoa’s first quarterly profit this year testifies. Demand in China and India has been driven by automotive, power transmission cabling and consumer goods. Even so it seems unlikely demand will recover to June 2008 levels of 42.4m tons before well into 2010, although the Reuters article is predicting +9% in 2010 and a further +11% in 2011.

At some stage all this metal that is playing financial games is going to have to be used, even if the 2009 spring deals are rolled over in 2010 depending on how the forward curves are looking consumption is going to be playing catch-up on production for some time to come. At the current range of $1800-1950 per ton, most smelters are above break-even and although the Chinese have stated that no new smelter licenses will be issued for three years that still leaves more idled Chinese capacity and new Middle East capacity to come on stream. Smelter capacity is running at about 80% at present. We say most capacity is above break even but this is based on conventional wisdom under normal circumstances. Today we have the weakest dollar we have seen for a long time. Smelters in countries like Australia (and even Western Europe) are hurting today at $1800-1850 per ton because much of their costs power particularly is in local currency making it proportionally higher than US dollar costs in countries with the exchange pegged to the US like China or some parts of the Middle East.

Many aluminum companies are struggling for other reasons, burdened by massive debts, nervous banks and a depressed aluminum price. UC Rusal has their 33% shareholder Glencore to thank for bailing them out of their current mess. So far, Glencore have taken 800,000 tons and are rumored to be taking another 500,000 tons of metal off Rusal’s hands, providing much needed cash flow.

According to China’s Chalco the country currently has 20-30% excess capacity equivalent to 2-3m tons. With the SHFE premium all but disappeared at present, speculative imports have diminished and there is more of an incentive for those smelters to continue to produce while the stimulus dollars are flowing. Fears that they may come to an end, although widely reported, are probably overdone. Behind the scenes, the international community is no doubt encouraging China to keep spending. It both creates a market for western goods and encourages Chinese exporters to stay at home.

–Stuart Burns

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