A minority of analysts are stimulating a debate predicting the aluminum market is, if not already in deficit, then in imminent threat of going into deficit.
A recent Reuters article entitled “Is this the year the world stops making too much aluminium?” details the issue. While we take issue with some of the article’s arguments, the subject is one that is causing concern among aluminum consumers as comments reported in the FT by Novelis underline.
Novelis says the rises in physical delivery premiums are indefensible and suggest the market is, rather than responding to reduced supply, being artificially squeezed. The US Midwest premium has risen to 20-21 cents per pound last week, according to CRU; that translates to about $450 per metric ton, or more than a quarter of the LME cash price.
European and Japanese premiums have also risen to new highs of $330 per ton and $300 per ton, respectively, the FT article quotes CRU as saying.
Back to Reuters: the article compares the consensus position that the aluminum market remains in surplus, generally held to be somewhere around half a million tons a year, to the outlier positions of Barclays and Macquerie, both well-respected commodity players in their own right, who say the market is going to be between 400 and 1,000,000 tons in deficit this year.
Here’s where we take issue: with the article’s (and other articles’) continual references to China in the discussion of oversupply.
So far, China has been in a completely separate universe to the rest of the global aluminum market; broadly in balance and protected behind export tariffs, the Chinese market neither imports nor exports more than a fraction of its requirement. Even its downstream activities are not hugely disruptive to global supply or prices, so to blame China for a low global aluminum price does not make a lot of sense.
Whether Western aluminum markets are truly in deficit or surplus, though, is a question of significant importance.
MetalMiner has been receiving a rising tide of inbound traffic on the topic, mostly from metal buyers worried that either the physical premiums will continue to rise and/or that a global deficit will drive LME prices higher, or both.
Because a bizarre paradox of the market is this: as far as consumers of processed products are concerned, the raw material element of the price that suppliers are quoting them is rising sharply, not because the LME price has shifted (that stays stubbornly in a $1,700-1,800/ton range), but because the physical delivery premium that processors are having to pay for their ingot is rising.
Not surprisingly, processors are having to pass this cost on, causing consumers to ask, if the market has 5-10 million tons of inventory and we are told it’s in surplus, why are raw material costs rising? What is happening to drive competition for metal to such levels that physical spot premiums are rising so strongly?
We get to the bottom of it in Part Two here.