COLUMN-Another light goes out in the aluminium market: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters)

By Andy Home

LONDON, Feb 3 (Reuters) - The International Aluminium Institute (IAI) has announced it will no longer publish its monthly producer inventory figures.

Its own members, it seems, are either not submitting the data at all or struggling to do so on a timely basis. The problems have become so acute that the IAI now feels that "the continued reporting of this incomplete information could be misleading".

In truth, the figures have lost a lot of their relevance over the years, a reflection of the way that the global aluminium sector has evolved, particularly in China.

But their disappearance represents another light going out in what is already one of the most statistically opaque base metal markets.

Aluminium is both the fastest-growing industrial metal market, thanks to the inroads being made into the mainstream automotive sector, and the most dysfunctional, thanks to the splintering of its pricing model.

Opacity may be part of the pricing problem. If it is, the lengthening statistical shadows may also pose a long-term threat to the metal's continued growth prospects.

GOING, GOING, GONE

The IAI's problems collecting its inventory figures became more acute over the second half of 2014 with 35 smelters, or around one third of its reporting network, failing to submit figures on time, or indeed, failing to submit figures at all.

Remember the IAI is at heart a producer organisation. All its members are producers and its primary function, as stated on its website, is to "increase the market for aluminium by enhancing world-wide awareness of its unique and valuable qualities."

Gathering and publishing statistical information ranks only fifth on its six listed objectives.

For production and inventory figures it relies on voluntary data submission by both member and non-member producers.

And, particularly when it comes to inventory, this reporting structure has lost much of its relevance.

Consider the chart below, which shows IAI inventory figures, both unwrought and total (including scrap, metal in process and products) since it first started reporting in January 1973.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on IAI inventory figures since 1973: http://link.reuters.com/cuf93w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

The long-term downtrend reflects many changes over that period, not least the growth of terminal markets such as the London Metal Exchange (LME) and a symbiotic shift by producers towards leaner inventory management.

But it also mirrors the shifts in global production over that period.

Russia, for example, joined the rest of the Western market after the fall of the Berlin Wall, but the IAI doesn't have inventory figures for the country, even though Rusal (HKSE: 0486-OL.HK - news) is itself an IAI member.

Even (Taiwan OTC: 6436.TWO - news) more significantly, its figures do not include China, which now accounts for around a half of global production. There is no inventory information channel such as exists with the China Nonferrous Metals Industry Association for the IAI's still closely-monitored production figures.

It's a far cry from when the IAI first came into existence in 1972 under its then name the International Primary Aluminium Institute.

Back then the known world's aluminium sector was dominated by six companies. Between them Alcoa (NYSE: AA - news) , Alcan, Reynolds, Kaiser, Pechiney and Alusuisse accounted for around 73 percent of world production, according to a paper written by Dr Carmine Nappi to mark the IAI's 40th anniversary in 2012. ("The Global Aluminium Industry - 40 years from 1972", available on the IAI's website.)

What they reported, in other words, really did represent a significant portion of the world's producer stocks.

Not any more.

THE HEART OF DARKNESS

Even with such caveats, though, analysts have used the IAI's unwrought aluminium stock figures to attempt to build a bigger-picture view of global inventory.

It's shown in the next chart and enjoy it, it's the last time you're going to see it.

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on total reported aluminium stocks: http://link.reuters.com/buf93w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Every individual component is problematic.

Japanese port stocks, for example, are far too narrow a gauge of what is lying close to consumers around the world.

Shanghai Futures Exchange (SHFE) stocks are merely the very small tip of a much bigger stocks iceberg in China.

And the LME stock figures have denoted very little other than the relative costs of storage between exchange warehouses and off-market sheds since stocks financing became the dominant game in town back in 2009.

Yet they are just about all we have to attempt to work out what's happening in this huge market.

Even the IAI's production figures present problems. Right now the IAI's estimate of unreported output in China is 3.6 million tonnes per year, equivalent to the combined output in western Europe.

More critically, the IAI doesn't publish figures, reported or estimated, for secondary production. Yet scrap's ratio of metallic input into U.S. production could be up to 70 percent, according to analysts at Macquarie ("Aluminium scrap - the dark missing part for supply", Nov, 18, 2014).

Quite evidently, such black holes in the supply and inventory picture make it very difficult indeed to assess what is happening to consumption.

Those analysts brave enough to attempt it use a combination of bottom-up and top-down calculations, cross-checking specific data series such as U.S. service center shipment figures with end-use sectors such as automotive and long-term growth patterns.

Unsurprisingly, given the amount of labour involved, their work is rarely for free.

IN THE COUNTRY OF THE BLIND

Missing is the sort of government-sponsored statistical agency slaving away in other base metal markets.

The various International Study Groups face the same problems as the IAI in terms of statistical black holes, first and foremost in China.

But at least their monthly updates provide some sort of visibility around which markets can spin their narratives.

The global aluminium market has gone down a different route, starting with the "Big Six" that between them controlled almost three-quarters of known production.

In the country of the blind, they evidently took the view that the one-eyed men could be kings.

But just how well do they see now?

This is a market, after all, that seems consistently to misunderstand its own dynamics, whether it be the failure to see the disastrous accumulation of excess supply in the global financial crisis or the failure to see how pricing would fracture between the LME basis price and physical premium.

So far this has favoured the consumer, notwithstanding the difficulties created by exploding physical premiums. All-in prices are still low and have been so for many years, assisting aluminium's long-term growth story.

But what if one day things change and the aluminium price starts experiencing the same sort of frenzied bull market that characterised copper at the start of this decade?

How will all those automotive producers who have engineered an ever-increasing reliance on aluminium into their products react?

And where will they find the statistical light to illuminate their path?

(Editing by David Evans)