Continued from Part One.
The producers (see Alcoa and Rusal’s annual statements) are increasingly predicting mill closures due to the loss-making or marginal status of many mills at current sub-$2,000 per ton primary metal prices.
Logic and history are both on the side of this argument, but current experience has suggested it is slow in coming. Back to HSBC, which reports world ex-China production was down just 1 percent over the January-to-May period this year as increased output in the Middle East and emerging Europe largely offset cuts in other regions.
While HSBC has seen slowing production in the world ex-China, they not do believe it is sufficient to balance the market anytime soon.
Some 1.6 million tons per year of capacity – representing about 3 percent of global capacity – is in various stages of being closed, though not all of it is going smoothly. So far, the level of production cuts has been slower than anticipated, and the much-anticipated closures in high-cost China have simply been matched, if not exceeded, by start-ups in low-power-cost western Chinese regions.
So on current performance, it does not seem likely that widespread closures will tighten the supply market so noticeably that primary metal will be in short supply. Local shortages are a possibility and may increase physical delivery premiums, but the underlying primary metal price is unlikely to move up strongly until cutbacks begin to eat into those massive inventories.
Currency movements are the final plank of the fabricators’ argument for higher prices. US consumers are if anything benefiting from a relatively strong US dollar, lowering the cost of imports and keeping a lid on price rises, but European consumers are facing the exact opposite.
As the euro weakens, external suppliers to the market — of which there are many, and who have a direct impact on prevailing market premiums — are facing lower returns in their home currencies, or in US dollars if that is how their cost base is structured. A rise for European consumers in euro terms looks likely as the euro continues to weaken and currency hedges taken out 6-12 months ago come to an end.
Currency movements will also encourage European producers to seek more sales in strong currency areas such as the US and Japan and present a threat to domestic producers later this year and next.
So all things considered, as far as the semi-finished aluminum market is concerned, a plausibly strong argument can be made for why we can expect higher prices in the fourth quarter of this year and into next.
Pressure is building from a number of sources and mills that are not state-owned will possibly look to switch sales to more lucrative markets if they cannot force through some premium increases, particularly in Europe.