Aluminum

Investing in aluminum production has always been an activity for those with deep pockets. New smelter projects are measured in billions of dollars and production capacities for green-field are rarely less than 500,000 tons nowadays. Witness the latest leap of faith, this time by BHP Billiton who is reported to be looking at damming the Congo River to build a 2.5GW hydro plant and building an 800,000 ton per annum aluminum smelter fed by Guinean alumina according to Reuters. The hydro plant alone is expected to cost $3.5bn and the smelter will no doubt be a further $1.5bn+.

This decade will see a lot of new capacity coming on stream. We have previously mentioned Alcoa’s Maaden JV in Saudi Arabia, Century Aluminum is re-starting work on their 360,000 ton geothermal powered plant in Greenland. Rusal is back at full production with further enhancements in the pipeline. Emal in the UAE is aiming at 700,000 tons eventual capacity. Existing plants like Aluar in Argentina are increasing capacity by 10% this year with plans for a further 10% later.

Meanwhile the elephant in the room is China. Production last year came in at just under 13 m tons according to stats from the International Aluminium Institute but capacity is close to 20 m tons. With prices at $2250/ton plus there is certainly no economic reason why that production capacity will not follow the global trend and start up this year.

Meanwhile stocks are at or near record highs on the LME and IAI un-wrought stocks yet prices remain firm and the physical premiums remain high, held up by that gravity defying conjuring trick called long term financing. I am not sure I would be rushing to buy Vedanta’s proposed de-merged aluminum holdings rumored to be coming to market this summer as a spin off entity. Vendanta may have a low cost production in India but even their projections would be hit if there is a substantial correction in the metal price. In the long run, either the price will come down or the stocks will come down, but the level of stocks and the price cannot remain high forever, it defies common sense. The key has been long term financing which in turn has relied on the forward price curve for aluminum on the futures markets remaining at a decent premium to spot, otherwise known as contango. For the time being, there seems no reason for the game to not roll on, but as we know all too well, all good things come to an end eventually.

–Stuart Burns

For any of you aluminum and stainless steel buyers out there, you will not want to miss MetalMiner’s first webinar given tomorrow, Wednesday March 10 at 9:00am CST. The webinar provides an in depth look at the global markets for aluminum and stainless steel and we will be joined by guest host, Tony Amabile from TW Metals who will cover domestic market trends for both metals. This webinar dovetails with MetalMiner’s new Price Perspectives Series, research that examines not just historical data but the drivers impacting prices looking forward through 2010.

As any metal market observer, buyer or analyst knows, the degree of commodity volatility occurring within the base metal, ferrous metal and precious group metal marketplace has never been greater. Forecasting, budgeting and planning have become more challenging as a result, forcing everyone to pay much closer attention to a broader range of factors impacting metals markets. We believe attendees of the event will walk away with the following:

  • a clear understanding of the drivers of current prices
  • the role and impact of China on both metals
  • cross-industry insight into where demand is coming from
  • tips, ideas and strategies for mitigating costs and reducing risk

The registration process takes less than 20 seconds. Please join us on Wednesday. If you have any comments or questions, please feel free to leave a comment here or drop us a line at lreisman (at) aptiumglobal (dot) com.

–Lisa Reisman

Last year we heard from dozens of MetalMiner readers that you would like to see a few metal market overviews via webinar. Based on the feedback we received, our audience appears split between the steel and nonferrous metal market updates. Therefore, we will split events up and stick to a one-hour format until you tell us otherwise. Initially, the webinar will include an approximate 20-minute overview of both aluminum and stainless steel markets. The market overviews will examine raw material costs, global supply and demand, with a special emphasis on Asian demand. Hosted by MetalMiner editors, Lisa Reisman and Stuart Burns the overview will set the stage for a deeper analysis of the US market led by Tony Amabile, Director of Marketing for TW Metals, a specialty metals market distributor and sponsor of the event.

The webinar is a no cost event for attendees and will appear live on Wednesday, March 10 at 9:00am CST. Readers can learn more about the event and register here MetalMiner Perspectives: Q2 Aluminum & Stainless Steel Market Update

About TW Metals: TW Metals has a leading position in the specialty metals market. TW stocks and processes pipe, tube, bar and rod in stainless, aluminum, alloy and carbon, as well as a variety of high alloys such as nickel and titanium. Headquartered in Exton, Pennsylvania, TW has a large distribution network in the U.S. as well as Europe and Asia.

We hope you can join us!

–Lisa Reisman

From a major slump in both demand and prices just 12 months ago, aluminum has made an amazing recovery. All the more amazing because at the same time as achieving a near doubling in price, inventory levels have also doubled since late 2008. Prices have increased more than many forecasters anticipated 12 months ago as both Chinese demand and the squeeze on physical availability by long term finance deals have combined to create a false scarcity of material in a market in surplus.

Back in late 2008, we wrote a research report for a major US industrial manufacturing client in which we made the following prediction for aluminum prices:

Source: MetalMiner Research

A little over a year later, we pulled out the report to see how our predictions compared to reality and the median prediction matched prices at the beginning of January 2010. Naturally we have seen some volatility either side of that line along the way with the dip in early 2009 as the most severe. But once calm returned after the panic of early 2009, the price moved back to our trend line by mid-year.

A range of factors has influenced and will continue to influence the market going forward. These factors include: inventory levels, production costs, market supply and demand but also the activities of investors in the exchange traded commodities markets and the ongoing economics around long term financing deals. As consumer of 39% of the world’s aluminum, China will play an integral part of this mix.

MetalMiner’s 2010 aluminum price perspective series provides additional insight into the aluminum market. The report includes a detailed analysis of input costs, a one year forecast (similar to the chart above), a deeper dive into the dynamics behind supply and demand as well as a section outlining the key road signs to watch throughout the year.

Readers can learn more about MetalMiner’s Aluminum Price Perspectives series here.

–Stuart Burns

Today, you may have noticed a few site changes. Back in January, we warned you that we might make a few. The biggest change involves MetalMiner moving into the world of ecommerce by providing metal market perspectives for the complete range of industrial metals products. You can find more information about those reports through the link here:

Price Forecasts New!

When we launched this blog site just over two years ago, we didn’t exactly have a clear direction as to what this site would become. But you have surprised us! And the world of analytics is one that fascinates me personally as it has given us an opportunity to fine tune the nature of the content we provide. You all have told us loud and clear that market changes, global economic trends and price direction are all things that are very important to you. So the price perspectives series really is just a natural extension of synthesizing all that we write on these virtual pages.

Now since we know most of you are in the sourcing/purchasing/procurement functions within your companies, we have tried to position the offering at price points that everyone can take advantage of and we hope that you will agree.

But now we thought we’d share with you a few tidbits about the reports so that our regular loyal readers will have some more insight as to what drove us to develop these reports and how we have structured them. First and foremost, we have structured them knowing you will probably not want to sit down and read a 100-page report aimed in the rearview mirror telling you all about last year. Instead, these reports (price perspectives as we have named them) examine just the basics nothing more and nothing less. Each report ranges in length from 7 13 pages. Wherever possible we have attempted to include MetalMiner IndX(SM) data, production cost models (you will find those in the aluminum and steel reports) as well as key road signs to watch as you coordinate this year’s purchases, and later in the year, your 2011 budgets.

Each report comes either as a single or as part of a yearly subscription in which you would receive one report per quarter. And of course, we offer volume discounts! Unfortunately, we will not launch with a few reports, namely tin, gold/silver, ferro alloys and aerospace metals. We will endeavor to get those reports completed inside of February.

And as always, please drop us a line with your feedback. We get a lot of great ideas from you!

–Lisa Reisman

This past week we lost the opportunity to put a stainless producer in front of our MetalMiner audience (for a white paper sponsorship) because the producer felt that, “what we’re looking for is really specifiers over purchasers. The value proposition had to deal with looking at the project lifetime costs of stainless vs. carbon steel. The producer felt that decision belongs with the specifier. But as a sourcing professional, I know that many of you obsess over total cost of ownership, total landed cost and total project lifetime costs (or whatever you want to call them). In fact, we conducted a webinar with software company Zycus and Purchasing Magazine on the topic of total landed costs and hold a record for most attendees at a webinar (The bulk of that audience had the title of purchasing manager, category manager or some other sourcing title). So we get it in terms of the importance of these concepts. But what I don’t understand completely and would like very much to open this up to your feedback involves one concept and one concept only:

In 2010, who drives product selection and ultimately the buying decision? Is it engineering? Is it the specifiers? Is it purchasing or a combination thereof?

My hypothesis: Increasingly, the sourcing organization has taken over the role of examining total project costs, total cost of ownership and certainly total landed costs in the case of global sourcing.

Wait before you throw the tomatoes (you engineers and specifiers). Let me explain. Of course with new product development, engineers drive material selection. For major capital projects in the oil and gas industries, for example, specifiers and project managers definitely play a big role in specifying materials. But I would argue that we have seen a few shifts take place in recent years challenging the notion that specifiers/engineers make all of the material selection decisions.

Let’s start with the hot topic in 2009 of improving working capital. We can’t think of many organizations that did not feel the need to improve working capital. With a relentless focus on reducing inventory and moving toward leaner models, we saw for example, purchasing managers examining lead times for “special and non-standard parts and materials to work collaboratively with engineering and specifiers to identify alternative materials and parts in an effort to shorten lead times as part of an inventory reduction initiative.

We have seen plenty of examples of companies that regularly purchase die-castings, that continuously examine the trade-offs of making material changes from say zinc to aluminum (particularly when zinc costs more per pound and aluminum offers a second benefit of weight savings). Who leads those decisions? I would contend the purchasing/sourcing organization in every case drives those decisions.

Finally, during the commodity boom of 2008 (pre-crash) for the first time in a long time, we saw senior executives of major corporations turn to the purchasing organization to either help manage raw material price volatility and/or drive cost savings throughout all direct material purchases. We would contend that purchasing led their organizations to switch from high cost nickel containing stainless 300 series materials to lower cost 400 series alternatives. Of course engineering and the specifiers had a major role in those changeovers but the initiatives started with either the executive suite, operations or purchasing. They rarely if ever start with specifiers or engineers.

Of course, I speak only anecdotally based on my own consulting experience working with a broad range of organizations. Am I wrong? Who drives material selection decisions in your company? Tell us!

–Lisa Reisman

In a surprise move the London Metal Exchange (LME) announced an increase in both warehouse rents and the cost of taking material off the exchange. Maximum rents are to rise by 4.9% while the delivery charge is to go up by an average 2.7%. According to a report in Thomson Reuters since 2004 LME rents across the six main contracts have risen by 59.9%, but vary significantly by metal with tin up by 78.7% but copper up by only 48.5%. The following graph shows the rise in rents since 2004, courtesy of Reuters.

Nevertheless the 2.7% rise outstrips inflation at 1.4% last year and estimated at 2.0% this year.

The size and timing of the rises, to take effect from April 1, will have the biggest impact on aluminum which has seen a massive stock and sale play over the last year. Because the contango on aluminum has been high, typically $32/ton over 3 months and $100/ton over 12 months traders and banks have sold excess production forward on the exchange at a premium over spot. From that premium they have paid storage, insurance and financed the deal at historically low interest rates, after which the balance is profit. So attractive has the deal been that some 3.5 million tons of the 4.56 million tons of aluminum on the LME is tied up in such deals. The new rates will push the average cost of storage up to $32/ton over 3 months and $140/ton over 12 months making the future for such deals highly questionable.

Many of the current deals come up for expiry in the second quarter and early in the third of this year. The expectation is warrants will be canceled and metal will be taken out for financing in cheaper non LME warehouses, a trend that was already gathering pace particularly in the US where aluminum was said to be increasingly stored in auto makers empty warehouses. Apparently the cost can be 1/10th of the cost of rents in LME warehouses and accounts for the acceleration in metal leaving and in canceled warrants metal earmarked for leaving. Traders looking to remove metal could face a problem however because warehouse companies are moving metal out at a maximum rate of just 500-600 tons a day compared to a rate of 2,000-4,000 tons that they are prepared to bring metal in. Needless to say they do not want to see their livelihood disappear out the door and are making it as difficult as possible for traders to move metal under long-term finance deals off warrant. Uneconomical storage deals and the prospect of higher handling costs could cause traders to dump metal before the deadline. The flood of metal leaving the exchanges could be misinterpreted as physical demand when it is not. It could be a volatile time for aluminum. We suggest aluminum buyers track LME inventory movements by warehouse as well as physical premiums being paid for prompt delivery. Detroit has been very active this year.

–Stuart Burns

NON-FERROUS-METAL-PRICES_011810_02

Anyone familiar with life in China’s big cities will not be surprised by the report’s findings – atmospheric pollution has been a problem for years but the report highlights that water pollution is also a major problem.   More than 209bn tons of waste-water were discharged into rivers and lakes in 2007 twice the government’s earlier estimates. Fearing social unrest if environmental problems are not tackled, the authorities are discussing taxes and other forms of control to get to grips with the situation.

Zhang Lijun, vice-minister of environmental protection said in a China Mining report to be wary of industrial projects that involve heavy metals, such as lead, mercury, cadmium, chromium and arsenic, suggesting new projects may not be approved or require expensive control procedures. The census revealed six industries including power generation, heating, minerals and non-ferrous metal smelting account for 88.5% of total sulfur dioxide emissions. China discharged 23.2m tons of sulfur dioxide in 2007 compared to less than 9m tons in the US, and 19.21 m tons of nitrogen oxides, respectively causes of acid rain and global warming. The US halved sulfur dioxide emissions by instigating an extremely effective cap and trade program back in 1990 following the Clean Air Act and Acid Rain Program. It will be interesting to see if China relies on the markets by doing the same or whether they go for centralized control and issue targets and deadlines.

A China Daily report on the census further revealed industry discharged 49.15 m tons of industrial waste and 39,400 tons of hazardous industrial waste in 2007 along with 900 tons of heavy metals. The shock to the authorities has been the level of agricultural pollution caused by over and indiscriminate use of fertilizers and pesticides but the issue for the metals industries will come more as a result of air and water pollution curtailing production as it did last year with lead producers or in declining planning applications for new facilities. Non-ferrous metal smelting has already been identified as a major source of sulfur dioxide either directly from the smelting process or indirectly from the massive amounts of power needed for processes such as aluminum and zinc production. Most of that power is generated from coal-fired power stations and on the whole is dreadfully inefficient from an environmental standpoint. Taking data from the US Energy Information Administration as a framework where Co2 levels are measured for the US and China we can see that while the Co2 emissions per capita are high for the USA at 19.2 mt/person compared to 4.9 in China that is due to the majority of the population in China living at a subsistence level. But the Co2 intensity, measured as emissions per unit of GDP, are 880 mt Co2 per million dollars of GDP in China compared to 443 in the USA, illustrating how incredibly polluting Chinese industry is per unit of GDP produced. As the standard of living rises in China the emissions per capita will rise unless the authorities take action and they know that. This more than tightening of capital and bank loans could provide the brake to relentless Chinese investment in primary industries. With a new five-year plan (now termed guideline) about to start from 2011, expect pollution and the metals industry to appear much higher up the list of priorities than it has in the past.

–Stuart Burns

Every now and then the idea of airships comes around again. Someone comes up with a new development that seems to open the door to a return of the idea only for it to be dashed by the cold hard economics of competing with relatively low cost established air transport. The very idea of airships has an old world glamor about it that should, one feels, find a place in the modern world alongside the cruise ship industry where the journey is the experience not just a means to arrive at a destination.

So it is no surprise that the latest project has all the usual magic ingredients: elegance, space, serenity mixed with a few new ones excellent environmental credentials and speed. The Seymour Powell AirCruise “Clipper in the Skies is showcased in conceptual form on a YouTube clip and although the music is a little irritating and at 5mins the clip is rather long it certainly captures the potential of such a craft. Samsung has picked up the original concept and they have commissioned Seymour Powell to produce a detailed design. We think of Samsung as makers of TV’s and domestic electronics but they also have a heavy industries division and are one of the world’s major shipbuilders so they know a thing or two about bringing such projects to reality. The design allows for up to 100 passengers and 20 support staff and crew to be carried at up to 12,000 ft (it’s unpressurized) and at a cruise speed of 90mph. That allows for London to New York in 37 hours or Los Angeles to Shanghai in 90 hours. The craft would be 270 ft high and weigh about the same as an Airbus A380 super jumbo. Like an aircraft, it would be constructed of lightweight materials such as composites and lithium-aluminum and titanium alloys. Hydrogen would be used to create the lift held in four individual containers even though it has been passed over in favor of the not quite so efficient gas helium in airships ever since the loss of the Hindenburg in 1937. Power would be provided by fuel cells drawing hydrogen from a compressed reserve also used to replenish the main lifting chambers if required. The outside of the airship would be covered by photovoltaic cells to provide power and combined with the emissions from the fuel cell essentially just water vapor would create near zero emissions. For those that can afford what would probably be high-end luxury prices, the AirCruise would provide guilt free travel like no other.

Will it become a commercial reality? Sadly it is unlikely, but if it does it will certainly be on my top 20 list of must do’s.

–Stuart Burns

Various noted market commentators were interviewed at the 16th annual Mining Indaba in Cape Town this week and the sentiment appears to be largely bullish. Playing safe most predictions were pitched at the long term such as Kevin Norrish, Managing Director of commodities research at Barclays Capital who said he could see prices rising steadily in 2010 and through into 2011 due to demand from China and the “financialization of the metals sector. By which we take him to mean the flows of investment money into metals commodities. “China’s commodity demand has reached critical mass, with global demand for copper from China rising to 35% last year from 15% in 2001. China is the most important factor in copper and commodity production, he said in a local paper  www.businessday.co.za, “We expect price increases to hit fresh highs by 2012, driven especially by insatiable demand from China as well as an expected rise in demand from members of the OECD. Norrish went on to say he expected the copper market to be in deficit in the next couple of years and prices to reach US$8,000 per metric ton.

Iron ore was also singled out for attention, this time by Magnus Ericsson of Raw Metals Group who observed China’s steel demand would drive iron ore imports up by 10% this year and the new benchmark would be 10-15% higher than last year we would pitch it higher than that but we will see.

Guy Elliott, CFO of Rio Tinto was particularly bullish for the long term saying to Reuters economic growth in China would double global demand for aluminum, iron ore and copper over the next 15 years. Rio is said to be increasing iron ore production by 10% in 2010 over 2009 but interestingly still have some of their aluminum smelters running at below capacity.

Last, on precious metals Tom Kendal, a precious metals strategist at Mitsubishi said platinum would reach $1,700/ounce in H2 2010 on the back of a global recovery in vehicle manufacturing and increasing emissions regulations.

–Stuart Burns

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