Aluminium

Aluminium has been plagued by overcapacity in recent years, and in January 2012 although, this was still the case, some good news did arise with the announcement of price-driven production cuts. Given the size of the market, however, these cuts were still largely irrelevant. Including the LME, China, Japan and producers, current stocks stand at around 10m tonnes. Indeed, trade data suggests that China took advantage of the sub-$2,000/tonne prices in December 2011 to replenish stockpiles. In a 45m tonne market, inventory levels this high are never going to permit a real sustainable price recovery. LME stocks are still around 5m tonnes, of which around 32% are accounted for by cancelled warrants. Given this level of cancellations you would have expected to see a much more pronounced reduction in total stocks than has been the case so far. The problems at the heart of aluminiums current situation remain slow load out rates from LME warehouses and a comfortable contango. As quickly as metal is being shipped out, new metal units are being delivered in to reap the rewards of the contango. Smelter closures announced in late 2011 started to show up in production numbers in February. The biggest reduction in production in recent months has come from China, where official statistics show that production was trimmed back by close to 1.6m tonnes from the September 2011 all time peak, however there is a belief that much of the Q4 2011 cuts were more a factor of reduced power availability than true market driven adjustments. Closures of capacity in Europe (both idle and active), provided some good news for the Aluminium market. All in all, this should see 2012 production (ex-China) down by about 500 000 tonnes compared to previous estimate. However, without further significant production cuts, the current economic climate will drag aluminium prices lower in the coming months. The fact that these production cuts came when prices were around the $2000/tonne level shows how sharply production costs have risen over the last couple of years. Although in February it looked like the likelihood of further and still much needed production cuts was diminishing, with a healthy contango, premiums on the rise and prices around $2,300/tonne, SBG downgraded their Q2 price forecast to $2,010/tonne in March 2012. At these levels, the possibility of further production cuts came back to the fore, despite physical tightness in the US and Europe. EU based smelters are very much in the firing line, but so too are those in Australia and Brazil. In China, however, the plans to permanently shut 270k tpy of outdated smelter capacity this year represent less than a 10th of new Chinese capacity due to come on stream. Output in early 2012 has already come back strongly and while vast stockpiles and overcapacity remain omnipresent, aluminium prices will likely continue to find it a struggle to push significantly above marginal production costs, even in a market heading back towards technical balance in the next couple of years. Given its wide range of applications, and the fact that aluminium continues to hold a fairly strong price advantage over other alternatives, CAGR for aluminium demand is almost guaranteed to outpace that of other base metals. Europe may slip into negative territory in 2012, but given the strength of demand growth in China, albeit at a lower rate than we have been used to, and the fact that in 2011 China accounted for an estimated 43% of global aluminium consumption, the overall demand outlook is far from bleak. Beijing continues to promote its pro-growth policies, and the latest PMI data seems to confirm that this is indeed functioning as planned.

However, post-holiday, Chinese buying in many industrial metals sectors was very disappointing and while Chinese aluminium demand is forecast to increase by 12% in 2012, this will be skewed towards the second half. Chinese aluminium demand is still showing double-digit growth although there is likely a strong element of stockbuilding buried within these figures. Real demand is also up year-onyear, albeit but at a much more moderate rate. SBG therefore revised down to Chinese demand forecasts to 8.9% in May. The US remains a hotspot for real physical demand, and in January net new orders for North American aluminium mill products were up 18% from a year ago and 23% on December. US premiums are also indicative of firmer demand in the region. After bottoming out in early January, Midwest premiums have been on the rise again, approaching last years record levels. However, financial demand is winning the tug of war for metal units, leaving a situation where current premium levels bear little relationship to underlying fundamental demand. There seems little likelihood of snapping the aluminium market out of its current deadlock. With no problems in terms of raw material supply either the chances of aluminium averaging anything more than the $2,140/tonne we are forecasting for 2012 still seem limited. Until stocks and production are brought under control the Aluminium markets prospects are not great, despite a strong demand outlook and rising production costs.