Is a Surge in Chinese Aluminum Semi Exports an Indicator of Rising Global Demand?

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Non-ferrous Metals

The aluminum flat rolled products market is appearing to go its own sweet way. Mills are reporting rising order books stretching into the fourth quarter and even daring to try for premium increases. The problem appears most acute in Asia with Chinese mills exports of semi finished products up 20% in June and expected to be a further 8% more in July according to Reuters. The report is quoting export numbers around 120,000 metric tons of semis in June and estimating July at 130,000. Exports from China are supported by a 13% vat rebate whereas primary metal is discouraged with a 15% export tax, although up to now exports have been the last thing traders were considering as record quantities of primary metal has flooded into the country. Indeed it is the presence of this imported metal that could be helping semi’s producers compete in export markets. Traditionally Chinese producers and the SHFE local market price have been at a premium to world prices making it very difficult for semi producers to compete, but with access to metal purchased earlier this year when aluminum was 20-30% lower, semis producers could be enjoying a temporary cost advantage.

Aluminum sheet and coil mills elsewhere appear to be equally busy as demand has picked up a little in Europe and North America. We understand many Europeans are on a reduced working schedule which is restricting supply, but they are reluctant to ramp up until they can see a clear recovery. Supply has also been restricted from some Asian sources. Our office in India for example reports the country has all but banned Chinese imports by imposing massive import duties on flat rolled products forcing consumers to buy from domestic producers. In addition, Hindalco had a major hot mill failure at their Renukoot mill on June 24 taking more capacity out of circulation. Indian mills are to all intents and purposes out of the market now until 2010. Middle Eastern distributors are casting around for flat rolled sheet supplies as mill deliveries rapidly move out to the year end.

Many commentators have taken the increase in mill lead times as a sign that distributors are re-stocking but our friends at reported this week that distributor inventories continued to fall in July and attributed the increased demand seen by mills as the distributors and consumers being driven to buy more hand to mouth from the mills as they face stock outs in many line items. This is undoubtedly creating a pent up demand that only requires a modest increase in real consumer demand to impact prices. The reason we have not seen significant distributor buying so far is probably one of timing. The distributors are not seeing sufficient strength in consumer demand to drive them to re-stock. The problem with watching distributor inventory reports though is they are historical. Mill lead-times and conversion premiums are the most reliable indicator of what’s to come and both have been in positive territory in recent weeks.

–Stuart Burns

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