Aluminum

Hi everyone. I had no idea how much you all like quizzes! I’ll do them more often. Here’s another one…

I have to admit that I haven’t read one article on this whole Google showdown in China. I’m assuming we all agree it’s a showdown of sorts. But an article with a headline like this one “Why America and China Will Clash, just grabbed my attention. Whether one buys steel or aluminum, a zinc die-casting or a finished part from China, the relationship between the two countries forms the backbone of many of our posts (not to mention many of your businesses) and some of our behind-the-scenes research. You may have noticed I haven’t penned too many metals-only pieces these past few days, (with the exception of a molybdenum article I wrote last week). That’s because we have been spending our days writing our market forecasts and price predictions for the various metals many of you buy.

We look at dozens of reports, attend conferences, speak to contacts, conduct primary research, survey buying organizations, run spreadsheet models etc- all in an attempt to get our arms around metals markets and the myriad road signs for the metals covered on MetalMiner. And in nearly all of our research, we attempted to assess the Chinese economy analytically looking at risk, growth scenarios, projections, macro economic indicators etc. But this Google story suggested a far riskier scenario, one in which few if any of us have likely considered. In the Financial Times article, the author, Gideon Rachman suggests, “that the assumptions on which US policy to China have been based since the Tiananmen massacre of 1989 could be plain wrong.

The author goes on to suggest that the case against China will likely be made by labor activists, security hawks and politicians. But we see it also coming from various business sectors. The article goes on to suggest that President Obama may toughen up its China stance with, “an official decision to label China a “currency manipulator. Increasingly we have written about the case against China in the area of exchange rate setting. But make no mistake about it. The United States is caught in a classic Catch-22. We have this debt because we import more than we export (and we have for years now). Those dollars that flowed into China are funding our current stimulus and rescue plans. According to a webinar I recently attended, by 2015 over 34% of our GDP will go toward debt service. Our growth in recent years has been fueled by deficit spending.

I admire Google for pulling out of China. Now what we the masses do, and what we’ll do if the relationship turns icy, well, that’s an entirely different matter.

–Lisa Reisman

STEEL-PRICES_011810_02

“What’s sauce for the goose is sauce for the gander.”   I never did quite know what to make of that saying but somehow it sprung to mind when reviewing the Q4 trade statistics in a Financial Times article this week. The issue being that although the trade statistics show the trade gap has widened to 9.6% (not good) the underlying reason is positive, that is industrial and consumer growth is rising (is good). Manufacturing and consumer demand is coming back and sucking in goods and materials to feed a growing manufacturing sector and a recovering consumer market. The numbers are still modest and many are rightly treating them with caution not wanting to place too much faith on a few months of data but several pointers are trending toward a solid pick up in activity.

Economists at RDQ Economics were quoted in the article as saying that during the last three months of 2009, export volumes climbed at an annual rate of 36.2% and imports increased at an annual rate of 35.4%. In November, imports climbed by 2.6% to $174.6bn while exports ticked up by 0.9% to $137bn led by cars, parts and food. Higher industrial activity and consumer demand raised imports of industrial supplies and consumer goods but interestingly at the expense of China with whom the trade balance improved reducing the deficit from $22.7bn to $20.7bn.

Richmond Federal Reserve Bank president Jeffrey Lacker seemed to agree when he said he expected the economy to now expand at a decent clip and he saw the risk of inflation edging upwards renowned hawk that he is. Despite unemployment persistently sticking around the 10% number industrial production rose 0.6% in December and capacity utilization rose to 72% from 71.5% in November. That is still below the long term average and with gas prices rising slowing to 0.2%, the smallest gain in five months, it looks like inflation risks are still pretty low. While that remains the case for inflation, interest rates will remain low and consumer sentiment should steadily improve. Indeed the Reuters/University of Michigan Surveys of Consumers’ preliminary index quoted in a Reuters article of sentiment for January inched up to 72.8, from 72.5 in December. The reading was the highest in four months and suggests those in work are feeling less insecure and more comfortable about the future. In time that will feed through into more spending helping the economy to pick up and eventually bring down the unemployment rate.

Metals are one of the few inputs into the industrial cost structure that are showing inflationary elements. Many non ferrous metals doubled in price last year and although steel costs have recently eased they are likely to increase as the year unfolds. We could see factory gate prices rise this quarter for certain products where metal costs are a significant cost of goods sold. With the dollar still weak, imports have not been able to play much of a role in countering rising domestic costs and perversely some of the metal price increases have been as a direct result of the falling dollar fueling speculative investments in non ferrous metals and related commodities.

–Stuart Burns

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Don’t be fooled by the flood of new economical small cars being announced this year, of which those on display at the Detroit Motor Show are only the beginning. Whatever the manufacturers may tell us, they are not really aimed at the US buying public. Led by Ford and Toyota, long the visionary leaders in developing the concept of the world car, a model so ubiquitous it would appeal in its standard form to buyers from Shanghai to Seville to Seattle, manufacturers have poured billions into developing models that can be produced on the same platform in multiple locations around the world and in so doing save them millions in production and duplicated R&D costs. Ford’s new Focus is probably the pinnacle of this trend, widely anticipated to be a huge hit in the US following its release at the show and already a best seller in Europe. While the economics of a one world car are indisputable it raises the question of whether  the world is really ready for the concept. The desire for small, medium and large cars varies dramatically around the world and to pour all one’s resources into developing small cars, manufacturers are ignoring a still significant market for medium to large saloons.

In 2009, 89% of cars sold in China were for the compact and sub compact market, stimulated no doubt by the government’s financial incentives to buy sub 1.6ltr engines, but in the US, which was going through the worst recession in 70 years, numbers had only crawled up to 21%. Jim Hall, managing director of motor industry analysis firm 2953 Analytics is quoted in the  Telegraph as saying manufacturers are perhaps fooling themselves, as outside of major urban centers like Manhattan, Boston and San Francisco, there is little actual demand for compact cars, especially with petrol prices back at the $3-a-gallon mark compared to the $4-plus peak in the summer of 2008 when oil topped out at $147-a-barrel.

Sales in North America for these small cars are likely to disappoint compared to other parts of the world and a better solution may be to develop more fuel efficient engines to power larger sedans (the route Mercedes and BMW are taking with their E class and 3 & 5 series diesel saloons),  some  of which are now capable of over 50mpg. Part of the manufacturers need for smaller cars stems from new environmental standards, with cars expected to be able to return 35.5 miles per gallon by 2016 under new US guidelines, manufacturers are judged on the average efficiency of their fleet. American buyers are, on the whole, not interested in small cars or in paying high upfront costs even if the long term economics are more attractive. Witness the hybrid market. After 10 years of availability in America – the most affluent major car market in the world only 2.8% of US cars are hybrids.

This has implications for the metal supply industry. Where during the recession the temporary  trend to smaller car sales exacerbated the decline in steel and aluminum consumption, the migration back to larger saloons likely to result from a gradual improvement in the economy will see a larger per vehicle metal consumption adding incrementally to metals consumption in the reverse of the demand destruction we saw last year. All this hype about a new generation Prius, the Nissan Leaf and GM’s Chevy Volt will amount to nothing in metal consumption terms. At a likely sales price of $30k, even after a $7,500 per car green technology rebate, sales of the Volt will be a dismally small part of the anticipated 11.5 to 12.5 million production units predicted by the industry for this year. And what does Mr. Hall think sales will be for 2010? He is expecting a double dip due to the heavily indebted commercial property market and says sales as a result will be just 10.9m. Let’s hope he’s not right on that one.

–Stuart Burns

Bloomberg’s recent poll of economists revealed some interesting predictions for 2010 GDP and employment. Some 60 economists were surveyed and the results ranked in various ways, the most interesting of which is possibly how successful each economist had been in the past. The top performer for the first three quarters of 2009 was Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, is quoted as saying “the rebound in stocks and rising incomes will prompt Americans to do what they do best consume. Household spending will pick up steam as we move into the second half of 2010, the overall picture for 2010 will be an economy growing rapidly enough to bring down the unemployment rate to an average of 9.6%. Faced with dwindling inventories and growing demand, companies will soon become confident the expansion will be sustained and so the economic recovery this time will be similar to past rebounds. Increasing stock values and a falling unemployment rate will encourage consumers to start spending again. Faster growth will push Treasury yields higher, up to 4.5% by year end and help the dollar strengthen as the Fed raises interest rates, he predicts.

Maki is more optimistic than Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, who was number one among forecasters of GDP during the 12 months through June 2009. Hatzius, estimates the economy will expand 2.4% in 2010.   His 2.5% first-quarter growth forecast is half the 5% pace Maki anticipates.

The Goldman team forecasts “sub-par growth next year because “employers will be reluctant to hire and households will exhibit “a bias toward higher saving. Budget difficulties at state and local governments and credit constraints will also restrain the economy.

Robert MacIntosh, chief economist at Boston-based Eaton Vance Management, (the most pessimistic forecaster on employment this year — and the most accurate) agrees with Maki that the economy will rebound in 2010, forecasting growth of 3.5%, and that the jobless rate will average 9.5%. “The combination of exports, investment and consumption will be enough to give us, on paper at least, a decent-looking economy, he is quoted as saying.

If the economists are correct, and they all predicted solid growth just at variable rates, then industrial demand will pick up and with it metals consumption. That will be supportive for higher prices in 2010 as emerging market demand is also set to grow at between 5 and 10% depending on the market in question. The only restraint on further price increases could be the level of stocks already built up for some metals such as aluminum and nickel or the overall strength of the US dollar. A strongly rebounding economy would suggest stimulus measures, particularly low interest rates, will be removed earlier rather than later which would normally increase the strength of the dollar and hence depress commodity prices. To what extent the economists GDP and unemployment predictions are realized remains to be seen but broadly we would see their expectations supporting our belief that prices will remain firm to rising in 2010.

–Stuart Burns

JP Morgan has come out with their predictions for 2010 and said they see two principal drivers to commodity prices taking hold. The first is a return to the fundamentals of supply and demand driving prices. The second is the withdrawal of liquidity from the investment market as the US stimulus package is wound down in late 2010.

The bank forecasts “above-trend growth” in the global economy in 2010 and 2011, which it said was good in general for commodities but some commodities are expected to move in one direction while others are expected to go in another. Oil and oil products for example are in oversupply. Inventories of distillates, which include diesel and heating fuel, have risen beyond market expectations due to sluggish industrial demand and unseasonably warm weather in the United States, the world’s largest energy market. The surplus in distillates will have implications over the next three to four months in terms of prices the bank believes, saying they do not expect the oil price to go anywhere in the first quarter or even into the second.

For industrial metals, JPM expects prices to be fairly strong in the first half of 2010, before losing some momentum and consolidating through 2011, specifically calling out the following price points next year:

US$/metric ton

Current Price

Q1

Q2

Q3

Q4

Copper

$6,905

$7,350

$8,000

$6,800

$6,250

Aluminum

$2,268

$2,150

$2,400

$2,200

$2,000

Nickel

$17,625

$17,000

$17,500

$16,500

$16,000

Zinc

$2,440

$2,300

$2,700

$2,650

$2,500

Lead

$2,348

$2,300

$2,700

$2,650

$2,500

Tin

$15,950

$15,000

$15,500

$15,000

$15,000

Lead and copper demand is being driven by strong growth in China due to automotive and infrastructure investment. They have been the star performers in 2009 and look set to continue in 2010. Aluminum has confounded many predictions this year, ours included, despite rising LME stock levels it has powered ahead as physical tightness has resulted from rising demand meeting so much of the material in warehouses being tied up in long term financing deals. JPM see this strength continuing into 2010 and mill premiums for both extruded and rolled products in the semi’s markets appear to be supporting this prediction. Nickel and tin however have had a lackluster year. Nickel reacting recently to concerns over the reinstatement of a 5% Russian export tariff rose strongly but nickel stocks are at 150,498 tons, just below all-time highs and stainless demand remains weak.

The removal of liquidity in the second half of 2010 will, JPM believes, impact investor liquidity and hence the flow of money into the metals markets. In addition, the bank sees more metal coming onto the market as long term financing deals are gradually unwound. As a result, the bank sees most metals prices easing in the latter half of 2010 and early 2011.

–Stuart Burns

Alcoa hasn’t lost sight of the long term even as it juggles production capacities and investment projects around the world in an extremely tight financial investment climate. Where Rio backed out of its 49% stake in the Ras Azzour aluminum smelter earlier this year because it failed to raise the capital for what was then estimated to be a $8bn project Aloca has stepped in with a more imaginative, if somewhat smaller, involvement.

Now Alcoa and a number of western partners said by Reuters to include Flour, Bechtel, Canada’s SNC-Lavalin and France’s Technip are to take a 40% stake in the project with Saudi Arabia’s Maaden taking the other 60%. The project will include a bauxite mine, alumina refinery, aluminum smelter and rolling mill is reported to now be estimated at  $10.8bn.

The plan is to mine some four million tons of bauxite from deposits near Quiba in the north of the kingdom and to refine 1.8 million tons of alumina on Saudi Arabia’s eastern seaboard. The plant’s smelter will have an annual aluminum production capacity of 740,000 tons and the complex will also house a rolling mill with an initial annual hot-mill capacity of 460,000 tons. The rolling mill was said by Alcoa to be designed for can stock, ends and tabs, although one unsubstantiated report suggested it may also make materials for the construction industry although that doesn’t logically fit with can stock gauges or grades.

According to the WSJ, the project will be developed and financed in two phases. The first output from the smelter and rolling mill is anticipated for 2013. Initial production from the mine and refinery is expected for a year later. Alcoa will arrange the supply of alumina to the smelter from outside Saudi Arabia until the project’s refinery is operating.

Alcoa no doubt sees this as a way to leverage their experience and expertise in the refining and production of aluminum products to gain a greater share of the off take from a new facility than they would otherwise be able to access from their minority 20% stake. For Saudi Arabian Mining (Maaden) there are obvious advantages to enlisting the involvement of the world’s most professional producer of aluminum if you are looking to sink  over $10bn in an aluminum venture. For Maaden, this is just one of many ventures into metals, minerals and chemicals to diversify the country away from its reliance on oil.

–Stuart Burns

We look at our in-bound mail and gauge inbound phone calls to determine what MetalMiner readers appear most concerned about when it comes to metals. This week, we heard a lot from aluminum buyers concerned about rising prices. Emails like this one from a large consumer products buyer, “Any idea what’s going on with aluminum? It’s going crazy right now, certainly say it all. And recently we heard something along opposite lines, “what’s going on with zinc because I’m wondering if I should switch some die castings over to aluminum again. So without further adieu, we bring you a recap of recent non-ferrous metals market insight:

US Aluminum Market Premiums Set to Increase in 2010

Copper Which Way Next?

Zinc Capacity Coming on Too Fast?

Should MetalMiner Offer Metal Market Webinars?

Well, we had to get a plug in and we heard from many of you with a resounding yes. Non-ferrous metal webinars (the non paying varietal) are on the agenda for 2009. We’ll let you know when those will be offered. We will cover the full range of non-ferrous metals including tin, nickel, lead, zinc, copper and aluminum as part of our 2009 price prediction series during the first few weeks in January. We will also assess how we did in 2009.

–Lisa Reisman

Aluminum Corporation of China (Chinalco), the country’s largest alumina and primary aluminum producer has not let the grass grow under its feet since losing the chance to increase its stake in Rio Tinto Alcan earlier this year. In the first ten months of the year, Chinalco added holdings of 53 million tons of bauxite reserves and 3 million tons of copper reserves. Chinalco’s primary alumina and aluminum capacity has gradually come back on stream as domestic demand has increased; the company is now running at 90% of alumina and 88% of aluminum capacity according to a report in Reuters. This is a dramatic improvement from August when the company stated it was operating just 67% of total alumina capacity and 83% of total primary aluminum capacity. It has about 11 million tons of annual alumina capacity and 4 million tons of primary aluminum capacity.

But Chinaclo is about a lot more than aluminum. According to the Peruvian Times Chinalco is to invest $2.15 bn in developing the Toromocho open pit copper mine in Peru’s central highlands, near Morococha in Junin. Production is set at 200,000 tons of copper per annum and is scheduled to begin in early 2012. Apparently Chinalco has aspirations for Toromocho to be the most advanced copper mine in Chile.

Nor are bridges with Rio completely burned, Rio themselves said just last week that they are keen to develop projects with Chinalco and the two firms have been in recent contact. In many ways the surprise during this recession is that Chinese companies like Chinalco have not been more acquisitive snapping up assets at discounted prices. The purchase of a sizable chunk of Rio’s assets would have been a major coup for Chinalco and explains their annoyance at being dumped when a better deal from BHP and Rio’s shareholders came along. But the failure is an example of a much bigger problem Chinese companies have had in buying into existing businesses. They have done moderately well investing in very high risk African green field sites but much less well trying to buy western assets on the cheap in that respect it has not been a good recession for China.

–Stuart Burns

Despite semis demand being down some 30% from this time last year, the North American aluminum market is comparatively tight for material, particularly for ingot, scrap and flat rolled semis. On the primary side, smelters with higher cost structures have been idled and the low dollar has encouraged the flow of metal from coastal smelters overseas to take advantage of higher premiums in Europe and particularly in Asia. Premiums for primary metal in Japan are the highest since 2006 and have doubled since the early summer of this year. Although Russia’s Rusal has been shipping metal to Glencore to be tied up in long-term financing deals, there has been less metal flowing to the US and less available for spot sale in Europe. Consequently, premiums have increased significantly since the summer helping to support the LME price.

Meanwhile the semi’s market, which crashed in both demand and price at the end of last year forced the idling of rolling facilities in a desperate attempt to match supply to reduced demand. Demand has since gradually picked up but producers have been slow to bring back idled capacity until prices begin to move up. As a result, we are currently in that stage of a recovery where demand is very slowly increasing but supply is not, creating the potential for a squeeze on prices in the New Year. Mills are sold out for this year so pricing now is for the first quarter of 2010 and for the time being mills appear largely to be passing through ingot increases. But if demand continues to uptick gradually each month, there will come a time soon when they will look to increase premiums again following October’s increase. So far the distributors, although carrying a little more stock than during the summer have not entered into a re-stocking program of any note, preferring like the producers to wait and see how demand develops.

Residential and commercial construction are flat, automotive is up a little and trucks should begin to show some growth early next year. The risks of a double dip appear to be receding. The recent drop in unemployment levels, though slight is an encouraging sign. If buyers are working on a value add premium over P1020 or Mid West Ingot then we would suggest fixing second quarter premiums at the same level as the first may not be a bad idea. The next few weeks will be very quiet now. Many firms appear to be going into the holiday shut-down early, not actually closing but postponing decisions and activity to next year. Come January we will have a clearer picture of how the first half of 2010 is likely to unfold and our expectation is flat rolled producers are going to go for premium increases before they bring anymore capacity back on line.

Did you know MetalMiner IndX(TM) publishes daily aluminum scrap prices in China? Click here to use this free application.

–Stuart Burns

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