Slackening global demand to hit aluminium prospects

Tags: Commodities

All producers have announced postponement of fresh capex plans

Slackening global demand to hit aluminium prospects
The world’s most abundant metal aluminium, has been an under performer in the base metals complex owing to weak demand and rising inventories at LME. The metal that has wide usage in packaging, aerospace, automobiles, construction and power, amongst other sectors, has been witnessing slackening demand due to slowdown in global economy, especially China, said Bitupan Majumdar, lead analyst for commodity and currency derivatives at JRG Wealth Management. For 12 months in a row, Chinese manufacturing continued to contract during October, as per data from HSBC.

China is the largest consumer of the industrial metals. Its consumption of aluminium is estimated at around eight per cent of the world total in 2012. The slow consumption growth is attributed to weaker economic statistics from the country. According to Chinese General Administration of Customs, the nation imported 827,350 tonnes of aluminium, up by 37.4 per cent in January through August, compared with the previous year. In order to revive the economy, the Chinese government has announced a $157 billion stimulus plan. It has also announced expansion of rail infrastructure and the housing sector, said Nalini Rao, senior research analyst for international commodities & currencies at Angel Commodities.

Reuters has reported that China’s State Reserves Bureau (SRB) issuing a tender to buy 160,000 tonnes of primary aluminium from local smelters. The tender is the first concrete sign that the country is resuming a programme of stockpiling base metals, with sources suggesting that SRB is set to announce the tender on Wednesday, although this was not announced on its website. Reuters had earlier reported that China’s influential state planner could revive its stockpiling plan as soon as this month to buy around 400,000 tonne of primary aluminium ingots and 165,000 tonnes of refined copper cathode for state reserves.

This volume equals around eight days of consumption for refined copper and nearly seven days for primary aluminium, and compares with China's current stocks of more than one million tonnes of both copper cathode and aluminium ingots.

According to Economist Intelligence Unit (EIU), Chinese aluminium production is estimated to slowdown at an average of 5.3 per cent during 2012-14 on the back of efforts by the Chinese government to reduce pollution and curb expansion of energy intensive industries.

On the issue of inventory, Majumdar said that on the one hand, demand issues for the metal have been persisting quarter over quarter, while on the other hand, the metal’s inventory is at a record level, surging more than six times from the lows seen in early 2006.

Aluminum inventory at LME accredited warehouses is above five million tonnes, at present, which is equal to almost 20 per cent of total global consumption in 2011.

As per market expectations, at least 60-70 per cent of aluminium stocks in LME warehouses are backed by financing deals wherein banks and traders trade in the aluminium price curve by buying spot and selling forward up to 15 months at a higher price. “Now the most pertinent question is whether the financing transactions pegged to metal inventory will end anytime soon. There are two basic things to watch for financing deals to reduce substantially. First, is the low interest rate scenario. Considering the current economic situation, there is low probability that either the US or other major central banks globally would go for any increase in rates in the medium term. Additionally, with the US Fed already announcing to keep benchmark rates low until late 2014, traders and investment bankers involved with financing activity are unlikely to face any issues at least on the monetary side,” he said.

The future of aluminium, according to JRG, does not look very promising in the medium term. While this would be the eighth surplus year for the metal, aluminium prices near $1,900-$1,800 per tonne at LME is critical, as at least 20-25 per cent of global producers are unable to recover even marginal costs of production. Due to its high dependence on energy and bauxite — both these components comprise 60-65 per cent of the total cost — low global aluminium prices have become highly unprofitable for a large number of aluminium producers.

We have seen production cuts or postponement of fresh capex plans by small, medium and large producers over the past couple of months. However, the actual cut is not enough to reduce supplies significantly.

“Considering the trend in global demand, which is slackening persistently, we could see the metal’s prices remaining in a tight range during 2012. However, the supply pressure at lower levels, financing deals and Chinese SRB buying may provide some support to prices,” said Majumdar.

Nalini Rao of Angel Commodities said, “Aluminium prices are expected to edge upwards in the coming months on the back of policy measures adopted by the Chinese government to boost the stalled economy and the monetary measures by developed nations to revive the economies. The prices may also gain ground due to increase in production costs as a result of cuts by large producers and high raw material costs. Prices may also rise from the recent SRB stockpiling of 100,000 tonnes of aluminium from domestic smelters. The quantum of increment may be capped by the increase in aluminium stocks and the slowing global economy.”

On the domestic front, India has the fifth largest bauxite reserves at 3.3 billion tonnes, but faces bottlenecks in supplies with regulatory issues relating to land clearances for mining activities. Technically, in the domestic markets, aluminum prices on MCX are expected to trade between Rs 102 per kg and Rs 111 per kg for the next one month, Rao said. zz

ritwikmukherjee@mydigitalfc.com

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