Presentations at the Harbor Aluminum Outlook conference tend to lean towards technical forecasts for aluminum price, inventory levels, and production costs for aluminum. However, equally important are glances at the bigger macroeconomic picture.
And this year, the European debt crisis takes center stage, just over China’s growth declines, and Ed Meir of INTL FCStone, a fixture in the metals analysis world, homed in on Greece, Italy and Spain, and what the US dollar can tell us about where aluminum prices — indeed, all commodity prices — are headed.
As Meir showed, the value of the dollar is inversely correlated with commodity prices. When the dollar increases, there is a decline in commodity prices, according to a graphic comparison between the dollar rate and the Jefferies CRB Index. This trend holds true for aluminum to dollar as well; it’s not super strong, but the correlation is generally there.
“I think the Greeks will vote the pro-bailout parties back in,” he said of the upcoming election. It is increasingly likely that Greece will eventually leave the Euro, and the numbers speak for themselves.
Greek debt is ridiculously high — as compared to when Russia and Argentina defaulted, Meir pointed out, Greece’s debt is four times as high as the other two countries’ was. One-third of deposits have been taken out of banks ($86 billion) and it’s simply impossible to collect taxes there.
“The argument to keep Greece in makes less and less sense as the months go by,” Meir said.
Some of his proposed solutions, then, are as follows:
- Europe could give Greece a “severance package” of sorts
- Suspend or reduce interest payments
- Set up firewalls to prevent Italy and Spain going the direction of Greece
- Keep the euro falling, that way exports will get going again
But Spain could be first to get out of the euro, according to Meir, even before Greece, based on high unemployment, missing EU deficit targets, being in recession since 2008, and having the highest rate of home ownership in the world (80%). Also, Spain has an export industry, which would benefit from leaving the EU.
The worst case scenarios for the markets, he said, are if Greek elections don’t go well, contagion spreads to Spain/Italy, the dollar moves higher, growth slows in the US and China due to “credit paralysis,” Iran tensions go unresolved, and commodity prices decline.
So How Does This Affect the Aluminum Market?
Basically, it’s still very hard for producers to make money on producing aluminum. Chinese are not succeeding in cutting back smelting capacity (as Macquarie Bank’s Jim Lennon made clear later in the conference day), and production there is up 9 percent since last year. China’s analyst firm Antaike says that capacity is set to exceed consumption by 2 million tons.
Meir contended that “production will be removed at an accelerated pace, especially if prices remain low” for a long time, and that the “majors are showing no interest in expanding capacity.” (LME stocks should be a non-factor until 2014, he says, due to warehousing issues.) The former estimation should hold true for Europe; however, if China continues to produce metal, the supply will hardly balance out.