18 | ANALYSIS

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Aluminium price falters as expected recession looms

We may be better prepared this time, but we may be over a barrel with oil, and more reliant on financing on held stocks than we ever have been, says our regular market contributor. Goran Djukanovic is an Aluminium market analyst, based in Podgorica, Montenegro.
The aluminium price has stabilised in the first half of October at around US$ 2,200 per tonne, after a sharp fall during September, together with other metals, on increased fears and pessimistic prognoses that the European and US economies may not be able to avoid a new recession in the near future. The atmosphere in the markets is becoming very similar to the one in the autumn of 2008, when ''a drive downhill without brakes'' aptly described the mood then. It is questionable whether the so called ''chain reaction'' or ''domino effect'' of negative economic news and parameters would inevitably lead to another global recession. US Feds warnings regarding significant downside risks to the economic outlook, along with Chinas worsening PMI, which contracted for a third consecutive month in September, triggered a sharp sell-off of base metals. The only visible difference between preparation for the crisis in 2008 and the upcoming one is this time it was broadly expected so it did not happen as a surprise. This is the key reason why still many believe the economic policy creators in Europe and USA will succeed in preventing deeper consequences even if an eventual recession occurs or a depressed market situation with a minimal growth of key parameters lasts for a longer period of up to five years. There is no visible restraint currently to prevent the aluminium price falling further before the year end, even below US$ 2,000 per tonne. Pressure on base metals prices is so high that even significant capacity closures would not be of much help unless economic sentiment improves soon. It seems that aluminium producers with higher production costs, above all in China and Europe, will need a little more time before they decide on capacity reductions and closures. This is because many still hope the LME price may recover by the end of the year. The author believes US$ 2,000 per tonne is a psychological limit for the price and if it is broken there would immediately follow substantial smelter capacity reduction. In contrast with the copper market, where all producers are cash positive even if the copper price falls to US$ 6,000 per tonne, about a quarter of world aluminium smelters are making losses with the current aluminium price. A strengthening US dollar, to around 1.34 per euro at the end of September, from around 1.45 per euro at the end of August, put additional pressure on base metals prices. The aluminium price has lost over US$ 400 per tonne in the last two months, while the copper price fell to US$ 6,860 per tonne in the first week of October, some 30 per cent down from the over US$ 9,800 per tonne at the beginning of August. Brent Crude Oil Futures fell to around US$ 100 per barrel at the beginning of October, rebounding to around US$ 113 /barrel by mid-

October on renewed demand growth expectations. In the authors opinion it is still a relatively high price for Brent and a further fall is needed in the remaining part of the year. It would be positive if the oil price would not react immediately on good economic news and should stay stable, around or below US$ 100 /barrel for the current euro /US dollar ratio. For the case it remains over US$ 110 per barrel major world economies will not be able to secure sustainable growth. Inevitably, questions arise: can Brent oil price fall significantly without a recession in the USA or Eurozone? Could recession be avoided with the current oil price? No doubt this relation and outcome will have a decisive influence on base metals prices during 2012. The primary aluminium market's surplus for January to July was 373,100 tonnes, compared with a surplus of 562,800 tonnes registered in the first seven months of 2010. Demand for primary aluminium excluding China was 24.62 million tonnes, 959,000 more than the equivalent total in 2010, according to the World Bureau of Metals Statistics (WBMS). Lloyd O'Carroll, Senior Vice President and Equity Analyst at Davenport & Co., sees an aluminium surplus of around 900,000 tonnes in this year, while Paul Williams of CRU forecasts that the world primary aluminium market will remain in a surplus of close to 800,000 tonnes this year. Williams sees that surplus rising to more than 1 million tonnes in 2012 even if a recession is avoided. However, similar to the LME aluminium stocks, these figures do not mean much in the

current market circumstances, due to financing deals and bottlenecks for the metal coming out of warehouses, especially in Detroit (USA). Aluminium output in the Western world should exceed demand by about 800,000 tonnes this year, with the surplus narrowing to 680,000 tonnes next year, and moving into deficit in 2015, according to Societe Generale SA. Inflated premiums While producers suffer because of a lower aluminium price, low interest rates with the global economy on the brink of another recession mean the bank financing deals that have locked around 70 per cent of aluminium stocks in warehouses will remain intact during 2012 and will inflate premiums. "I think with the contango being around US$ 35-36 still a lot of metal is going to finance, so I don't expect that premiums will come off substantially," a trader at a European merchant said. Cash aluminium has traded at a discount of between US$ 33 and US$ 38 against the benchmark three-month contract since early August, which is profitable for financing deals. In a typical deal, a bank buys aluminium from a producer, sells it forward at a profit and strikes a warehouse deal to store it cheaply for an extended time period. Financing deals started in the aftermath of the credit crunch in late 2008 and have tied up stocks in long-term rent agreements. For the case of another recession, demand for aluminium would further fall and even more metal would be stored in

Aluminium Times October/November 2011

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businesses. LM24 pressure diecasting ingot fell to 1,580-1,670 (US$ 2,465-2,605) per tonne from 1,610-1,680 previously, while LM6/LM25 gravity diecasting ingot slipped to 1,880-1,960 per tonne from 1,900-1,970 per tonne. Were seeing some slowing down in some areas, some rescheduling, and prices have come down, a producer said to Metal Bulletin. Alcoa Inc., the first company in the Dow Jones Industrial Average to report earnings this quarter, posted profit that trailed analysts estimates, saying European customers dramatically cut orders on economic uncertainty. Chief Executive Officer Klaus Kleinfeld said European aluminium demand will decline 13 per cent in the second half from the first. North America Aluminium extruded product shipments by North American producers totalled 264.7 million lb, or 120,067 tonnes, in August, up by 6.4 per cent from 248.9 million lb in the same month last year, according to Aluminum Association data. Shipments increased by 9.5 per cent over the July revised total of 241.8 million lb. Extruded shapes shipments rose to 202.4 million lb this year from 182 million lb a year previously, though shipments of rod and bar fell to 37.4 million lb from 39.8 million lb, and shipments of pipe and tube dipped to 25 million lb from 27.1 million lb. Based on a five day week and 15 shifts, extrusion press utilisation totalled 74.5 per cent during August 2011 and 75.5 per cent year to date 2011. The YTD shipments through August totalled 2.03 million lb, up by 9.7 per cent over the 2010 total of 1.85 million lb. (Source: AMM-Metal Bulletin) Aluminium shipments from US metals service centres in August showed improvement from both a year ago and the prior month, according to the monthly activity report from the Metals Service Center Institute. A total of 135,900 tonnes of aluminium products were shipped by US service centres in August, an increase of 7.3 per cent from the same month in 2010. It was also an increase of 15.6 per cent from 117,500 tonnes in July. For YTD 2011, aluminium shipments were 1 million tonnes, an increase of 18.2 per cent from the same period in 2010. Inventories of aluminium products were 360,800 tonnes at the end of August 2011, an increase of 11.9 per cent from August a year ago and an increase of 1.9 per cent from last month. At the current shipping rate, this represents 2.7 months of supply, according to MSCI. Canadian service centres shipped 12,700 tonnes of aluminium products in August, an increase of 12.2 per cent from the same month in 2010. For the year to date, aluminium shipments were 97,900 tonnes, an increase of 9.1 per cent from the same period in 2010. Inventories of aluminium products were 34,300 tonnes at the end of August, an increase of 8.2 per cent from August a year ago and an increase of 3.8 per cent from the previous month. At the current shipping rate, this represents 2.7 months of supply. China Imports of primary aluminium, alloy and semifinished aluminium products to China fell 6.8 per cent m/m to 66,163 tonnes in September after posting monthly gains in August and July, according to data from the General Administration of Customs. It was increase of 0.6 per cent from a year earlier. Domestic aluminium prices fell in September, prompting fabricators to buy metal at home, and discouraged exporters from selling spot aluminium and alloy to the international market, traders said. China's exports of primary aluminium and alloys fell by 2.4 per cent from the previous month to 60,715 tonnes in September, but rose 10.2 per cent from September 2010. Prices for the frontmonth Shanghai aluminium contract, which typically reflects spot prices, dropped 4.5 per cent in September. The LME cash aluminium prices fell 12.6 per cent in September. Aluminium scrap imports rose 10 per cent to 220,000 tonnes after posting a fall of 9.1 per cent in August. In its latest report, Alcoa forecast that China will see demand rise 17 per cent this year compared

warehouses tied in financing deals, bringing more profit to both owners of warehouses and owners of metal (banks). Barclays Capital recently bought a stake in a metals warehouse, following Goldman Sachs, JP Morgan and Glencore. The business is lucrative as long as interest rates remain at record low level in USA and contango is high. The locked metal is inflating physical premiums while the amount of LME stocks is not relevant (at 4.55 million tonnes in mid-October). Aluminium premiums in Europe fell during October reflecting concerns over a potential 2012 economic slump, but German industrial demand and financing deals are keeping relatively strong demand for now, traders said. The premium for duty-paid physical aluminium in Rotterdam was quoted at US$ 185-205 over the LME cash price in mid-October. That is down from mid-August, when premiums were quoted around US$ 200230.T raders noted a divide between countries in the north versus the south of the European Union. German industry has kept orders stable, while consumers in the debt-plagued south have preferred to de-stock as 2011 business begins to wind down. Orders from the auto sector remained high, while traders pointed to weakness in extrusions demand especially in south Europe. T raders said that term deals for 2012 were delayed, which in essence suggested more material would be sold on the spot market next year. Consumers are playing a waiting game to see how the European debt crisis will unfold. It is clear that without financing deals the premiums and LME aluminium price would be significantly lower than current levels, even without the threat of a new recession. Secondary prices weakening European secondary aluminium ingot prices fell in mid-October as economic uncertainty continued to stifle buying activity, but the range widened as producers selling the majority of their production to the German manufacturing sector enjoyed better prices. DIN226 pressure-diecasting ingot fell to EUR1,720-1,830 (US$ 2,368-2,519) per tonne from EUR 1,760-1,850 previously, with deals reported across the new range (Source: Metal Bulletin). "Prices should go down (from the current level) by about EUR 50-100 per tonne because of lower primary aluminium prices on the LME," said a buyer, who conceded that because scrap was in tight supply the price reduction would probably be less. A large European automaker, and consumer of alloy, said that things were still positive and they were still planning to increase car production in the next few years. If this bad news about the global economy stays in the market then you will have people selling (alloy) at lower numbers. Demand is still strong for the rest of this year. If prices go down it will be psychological," said an alloy producer. Most sellers were sold out for September business and were looking to close October/November sales. "We're getting a lot of inquiries on October prices," said a southern European producer, who added it was still too early to say which way prices would go at this stage. (Source: Platts). In the last week of September, UK secondary aluminium ingot fell as falling primary prices on the London Metal Exchange saw raw material prices dip, and the weaker euro put pressure on

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with a previous projection of 15 per cent. The LME aluminium price at around US$ 2,200 per tonne makes the metal attractive for imports in China, which will somewhat support the price during the last quarter and may accelerate China to a net importer faster than expected. Most of the aluminium product exported from China goes to Japan, which is in the midst of an infrastructure reconstruction drive post the March Earthquake. Aluminium inventories at the Shanghai Futures Exchange (SHFE) surged 39,754 tonnes in midOctober to 117,132 tonnes, after sinking to a fouryear low a month earlier, according to a survey of 20 warehouses. Inventories declined around 300,000 tonnes since January. China's recycled aluminium output is expected to hit 5.8 million tonnes by 2015, up 45 per cent from 2010, Beijingbased China National Resources Recycling Association or CRRA said, Platts reports. China produced 2 million tonnes recycled aluminium in 2010, up 29 per cent from 2009, figures from China Nonferrous Metals Industry Association showed. Japan Aluminium stocks held at three major Japanese ports fell 4.1 per cent in September due in part to higher demand from the automobile sector, but overall demand lacks strength, trading house Marubeni Corp said. Aluminium stocks at these ports fell by 9,800 tonnes to 231,400 tonnes as of the end of September from 241,200 tonnes a month earlier, said Marubeni Corp, which collects data from the key ports of Y okohama, Nagoya and Osaka. "Demand from the car sector is strong at least for now, but demand overall lacks strength. The outlook is increasingly uncertain due to the global financial turmoil," stated Marubeni. Industry officials see stocks worth 10 per cent of the imports, or around 200,000 tonnes, as appropriate. According to the Ministry of Finance, Japanese secondary aluminium alloy imports from China are increasing. The imports stood at 40,840 tonnes in August, increasing by 13 per cent from a year earlier and by 21per cent from July. The total imports were 91,831 tonnes in August increasing by 4.5per cent from a year earlier. Several Japanese trader sources said that the import is likely to maintain a high level, around 40,000 tonnes per month, until December at least, due to increased demand from automobile industry. Alumina Indian state-run National Aluminium Co Ltd has finalised a long-term contract for 270,000 tonnes of alumina exports at 16.2 per cent of the LME aluminium price on an FOB basis, Commercial Director Ansuman Das told Reuters in midOctober.The London-based buyer will receive the alumina in nine batches of 30,000 tonnes each between January and December next year. NALCO, whose tenders serve as a global benchmark, last month finalised a long-term contract for another 300,000 tonnes of alumina exports for deliveries in 2012 to a European buyer at about 16 per cent of the LME aluminium price on an FOB basis. At the end of September, an Australian producer reported the sale of a mid-November 25,000 tonnes shipment at US$ 366/mt FOB Western Australia with 30 days credit. There have not been many Australian cargoes on offer in September.

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Aluminium cash price forecast, 2011 & 2012 2011 2012 US$/t US$/pound US$/t ABN AMRO * 2437 1.105 2385 Bank of America - Merrill Lynch 2578 1.169 2800 Barclays Capital 2613 1.185 2750 BNP Paribas 2485 1.127 2825 CIBC 2380 1.08 1874 Commerzbank 2650 1.202 2800 Credit Suisse 2490 1.129 2535 Danske Bank 2498 1.133 2525 Deutsche Bank 2462 1.117 2600 EIU - Economist Intelligence Unit 2486 1.127 2456 Goldman Sachs 2557 1.16 2601 HSBC 2546 1.155 2601 MF Global 2470 1.12 2350 Morgan Stanley 2600 1.179 2800 Natixis 2450 1.111 2650 Royal Bank of Scotland 2601 1.18 2778 Scotiabank 2491 1.13 2447 Standard Bank London 2530 1.147 2570 Standard Chartered * 2539 1.151 2450 Source: Companies reports - September 201 * 3-month LME price Company China's alumina imports more than doubled in September compared to August's multi-year low, as higher domestic aluminium prices narrowed the gap with London Metal Exchange prices. Alumina imports rebounded to 80,000 tonnes in September from 35,144 tonnes in August, reversing an eightmonth slide. During the course of the year China showed it is approaching equilibrium in terms of its ability to produce enough alumina to supply its massive smelter system, there even remaining a small quantity for exports. The cumulative alumina exports from China were up by 44 % YOY to 60,000 tonnes in the first eight months of 2011.

US$/pound 1.08 1.27 1.247 1.281 0.85 1.27 1.15 1.145 1.179 1.114 1.18 1.18 1.066 1.27 1.202 1.26 1.11 1.165 1.111

On Friday, October 14, Platts Alumina FOB Australia index was at US$ 355 per tonne, while Metal Bulletin MBs FOB Australia alumina index dropped to US$ 354.05 per tonne on the same day, with the majority of business confined to two tenders that went at around 16 per cent of the London Metal Exchange aluminium price. Final comments Aluminium producers should focus on increasing production of recycled aluminium and rolled and extruded products for use in automobile industry in next few years. On one side, they will spend much less energy (only 5%) on processing

secondary aluminium compared to the production of primary aluminium, and on the other, demand will grow significantly by 2015 on more use of aluminium in transportation. Existing financing deals and hidden metal at unregistered warehouses and producers warehouses are good for preventing aluminium price seeing a further and significant fall during the last quarter of this year, as was the case in the last quarter of 2008. In all regions of the world, excluding China maybe, stocks are at high levels or very high while restocking activity is on the way. After a quiet week, the first week of October, with analysts and traders from all over the world gathering at LME Week in London and Chinese traders off on national holiday, the aluminium price remained depressed by mid-October. The reason is there were no optimistic prognoses to be heard during LME Week on base metals prices prospects in the final quarter of this year, neither were there for 2012. A number of banks decreased their forecast for the average aluminium price in this and next year during the LME Week, including Standard Bank London, Natixis, Credit Suisse and Morgan Stanley. If we judged on price performance in last years final quarter, the aluminium price should be unstable by December, finally finishing with sharp growth in last two weeks of the year. However, there is big pressure on the euro from the American side, with daily predictions of various institutions and experts that it will collapse, together with the entire European Union, that it is very likely the US Dollar will strengthen towards 1.3 per Euro within the next six months, limiting any potential growth of base metals prices in the remaining part of the year and most probably in the first half of 2012. Since there are no visible signs on the horizon at this moment, based on fundamentals, which envisage any substantial price growth, the aluminium price will struggle to retain current levels and remain above US$ 2,000 per tonne during the next two quarters. More financing deals, stored metal hiding and capacity closures may prevent further falls.
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Aluminium Times October/November 2011