Aluminum, Up or Down: An Intriguing Debate, Part Two

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(This is Part Two of a two-part series. Read Part One here.)

Global demand is irrefutably rising — Alcoa estimates at 12 percent this year, after a 13 percent rise last year. Reuters suggests it could be 15 percent saying this year it could reach 45 million tons compared to 39 million last.

All of this sounds bullish, right? Supply is being constrained, demand is rising strongly and even the stars are aligned for a push higher. Well, no, says the counter argument. Ed Meir is quoted in the article as pointing out that the production capacity the Chinese have idled can easily be turned back on; indeed, previous closures in the second half of last year were reversed in some situations. Truly, China has a massive overhang of production capacity, some of which has barely seen the light of day in 2010 before being temporarily idled to meet environmental limits. Producers must be desperate to get this back on stream and with the cost of production around $2100 per ton in China they would be making healthy profits if they were able to do so.

 

Meanwhile global stocks are still huge — in the region of 10 million tons (if reported and unreported are combined) — and the market remains in surplus, estimated in a Reuters survey to be around 383,000 tons in 2011. Having said that, there is a huge range depending on who you speak to: the survey ran from 1 million tons deficit to 1.5 million tons surplus as the possible outcomes for this year!

The 800-pound gorillas are those long-term finance deals that are tying up so many millions of tons of primary metal in warehouses. We have written about this situation many times before, the death knell has been sounded on numerous occasions, either due to a flattening of the forward price curve, or rising warehouse rents, or rising finance costs most likely due to rising interest rates. For the time being, the deals continue, but detractors say that if that metal starts finding its way back into the market (and the first sign will likely be falling physical premiums) expect the aluminum price to drift south.

If you were expecting this analysis to finish with blinding insight into which direction the price is going this year, we are sorry. Our money is on a continuation of the status quo, and the risk is, in our opinion, more to the downside than the up. Prices could drift off to $2300 this year, maybe $2200 as premiums weaken or those Chinese smelters restart in any significant numbers. The upside has to be capped by the surplus most observers think we will experience this year, but could still be around $2650-2700 per ton. Keep an eye on those physical premiums and reports of Chinese smelter re-starts.

–Stuart Burns

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