Bloomberg reported that the biggest decline in aluminum prices since the global recession means at least 25% of the world’s smelters may be unprofitable.
As per report, the metal fell 23% to USD 2,135.50 per tonne on the London Metal Exchange since May 1 and energy costs gained 16% in the past month. 25% of production loses money below USD 2,350 and 50% under USD 2,000.
Mr Jochen Hitzfeld analyst at UniCredit SpA in Munich said that about 10% of output may be shut by the Q1.
Alcoa Inc said last week that significant part of global capacity is marginal. Aluminum Corporation of China Limited said in October that prices are close to output costs.
According to the International Aluminum Institute, when demand and prices weakened in 2009, smelters curbed supply by about 5% in the H1 of the year. Futures rallied 37% in the following six months.
Mr Nick Moore head of commodity research at Royal Bank of Scotland Group Plc in London said that “In the current environment, where in excess of 20% of the industry is losing money, it seems likely that cutbacks will be needed. The dividend from those cuts will be raising prices.”
1. Price Forecasts
According to the median estimate of 17 analysts surveyed by Bloomberg, aluminum fell 13% this year, less than any of the five other members of the LME Index of industrial metals which dropped 19%. Prices will trade at USD 2,000 to USD 2,350 in the next 6 months. The MSCI All Country World Index of equities slid 6.9% this year and Treasuries returned 8.9%.
Barclays Capital predicted that the Standard & Poor’s GSCI gauge of 24 commodities fell 12% since the end of April on mounting concern that slowing economic growth will curb demand for raw materials. Aluminum consumption will expand 7.7% this year, compared with 19% in 2010. The London based IAI estimates global production reached a record daily rate in September and Morgan Stanley anticipates a 690,000 tonnes surplus this year enough for more than 10,000 Boeing 747-400s.
According to Brook Hunt, a London based research unit of Wood Mackenzie, producers are also contending with rising energy prices which account for 30% to 40% of smelting costs. Crude oil traded on the New York Mercantile Exchange rallied 25% since the start of October as aluminum dropped about 2% on the LME.
2. Eight Analysts;
Mr Michael Belwood spokesman for Alcoa in New York said that “With LME pricing in the USD 2,200 range we believe a significant amount of the industry’s global capacity is marginal. The company will report 57% drop in Q4 profit to USD 110.3 million.
According to data compiled by Bloomberg Industries, premiums paid by consumers for immediate supply in the US Midwest rose 36% this year, a sign less metal was available. While inventories in warehouses monitored by the LME reached a record 4.71 million tonnes in May, as much as 80% is tied into financing deals.
The transactions typically involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery months cost more than nearer dated metal.
3. Tight Range;
Mr Christoph Eibl who helps manage USD 2.5 billion of assets at Tiberius Group in Zug, Switzerland said that “Looking at aluminum, you realize that there is so much on stock but there is so little available. It’s an engineered market and that’s why the market is trading in such a tight range.”
Premiums also advanced because the rate of deliveries from the biggest warehouses was so slow that customers were waiting as long as seven months to withdraw metal from LME approved warehouses in Detroit in July. The LME plans to increase the minimum rate at which metal must be delivered in April after some clients said the backlogs were distorting prices.
Mr Nicholas Snowdon commodities analyst at Barclays Capital in New York said that the smelter cuts during the recession may not be repeated now because prices haven’t fallen by the same amount globally and premiums are boosting revenue for smelters.
Aluminum averaged USD 2,482 in London this year compared with USD 1,705 in 2009. Prices on the Shanghai Futures Exchange did even better averaging CNY 16,989 per tonne. Stockpiles monitored by the bourse in China, a nation which accounts for about 40% of global output fell 72% this year.
4. Aluminum Consumption;
According to the International Monetary Fund, the world economy will expand 4% this year and next compared with 0.7% contraction in 2009. China accounting for two in every 5 tonnes of global aluminum consumption will grow 9% next year.
Mr Luo Jianchuan president of Chalco said that that would still be slower than the 10.3% expansion China saw in 2010, when aluminum advanced 11%. Shares of Beijing based Aluminum Corporation of China fell 38% in Hong Kong trading this year. Aluminum prices are close to production costs.
5. Norsk Hydro;
Norsk Hydro ASA had no plans to restart shuttered capacity for now because of macroeconomic instability and market uncertainty. Hydro based in Oslo, cut smelter output by 26% to 1.25 million tonnes in 2009. Shares of the company fell 30% this year.
Mr Peter Richardson chief metals economist at Morgan Stanley in Melbourne said that “There are signs that we are seeing a more disciplined approach from producers in balancing supply and demand. A price rebound has to be driven by a relatively disciplined supply position but more importantly, a strong recovery in demand.”
(Sourced from Bloomberg.net)
