A recent video report on the Reuters Insider service covered some interesting points regarding the aluminum market. Aluminum has moved from being in profound over-supply to balance from last year to this, so the debate that developed between David Thurtell a Citi Bank analyst and our favorite Reuters Base Metal columnist Andy Home proved rather timely.
Global aluminum annual production has dropped by about a one million ton run rate equivalent this summer largely due to the closure of Chinese smelters. The capacity cut backs are due to a number of factors but principally margin pressures on higher cost or less efficient smelters and latterly due to aggressive energy consumption targets set by Beijing for China to achieve by the end of 2010. As we saw with the mass idling of polluting industries around Beijing prior to the Olympics in 2009, Beijing can act decisively when it wants to and having staked its colors to the mast over these energy targets it will do whatever is required to be seen to achieve them even if that essentially means cheating by temporarily closing major energy consumers like aluminum smelters. Aluminum production fell to an average 111,300 tons globally in August, that’s the lowest level since March, largely on the back of a reduction to 44,800 ton daily average in China, the lowest since January.
Meanwhile consumption has continued to rise around the world, first narrowing the surplus gap and now putting the market into deficit. In David Thurtell’s opinion, the market has been in deficit for some months and he expects prices to rise as a result going toward year-end. In addition to the reduction in supply, Thurtell saw the roll out of aluminum backed ETF’s as supportive for prices and said prices could be lifted by 5-10% as a result. Andy Home was not so convinced that ETFs would have a significant effect on price arguing that in probability, every ton of aluminum that will go into the ETFs, when they finally pass regulatory approval and are formally launched already sits in the warehouses of the companies that will run the ETF’s. Or if not in their warehouse then certainly off warrant and the transfer to ETF stocks would have no impact on metal availability in the market. David Thurtell said ETF holders were typically long-term holders of metal but as Andy Home pointed out no-one has been more long-term in aluminum than the banks and traders playing the stock and finance game in aluminum over the last five years those same companies that will be the source of material for the ETFs.
When asked how supportive this was long term for aluminum prices, the two commentators took differing time frames. Thurtell said that for a country to produce more aluminum than it consumed and therefore to be a net exporter of aluminum was to be a net exporter of energy which for a country like China, a heavy importer of oil and simultaneously struggling to control pollution and carbon dioxide emissions, to export energy is senseless. As such he sees long term growth in aluminum production in China as being limited and due to dwindling energy supplies globally supportive of prices. Ever the pragmatist, Andy Home took the short view and while expressing an expectation for price increases through the end of the year and early next, felt that price increases next year would be capped by the twin dynamics driving the current capacity closures. First, Beijing’s energy targets are year-end focused and could be relaxed in the new year. Second, some of the capacity was idled due to margin pressure as cheap energy deals were curtailed earlier in the year. If aluminum prices were to rise too much, some of that capacity would become profitable again and production would rise, eating into any supply deficit.
All in all though the consensus is that fundamentals are supportive for firmer pricing in the coming months. By how much and for how long is unclear but based on Reuters discussions current prices may be the low point for the fourth quarter.