Advertisement
UK markets closed
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • CRUDE OIL

    83.11
    +1.76 (+2.16%)
     
  • GOLD FUTURES

    2,241.80
    +29.10 (+1.32%)
     
  • DOW

    39,778.36
    +18.28 (+0.05%)
     
  • Bitcoin GBP

    56,102.90
    +1,697.96 (+3.12%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • NASDAQ Composite

    16,381.05
    -18.47 (-0.11%)
     
  • UK FTSE All Share

    4,338.05
    +12.12 (+0.28%)
     

COLUMN-Shooting the messenger won't help the aluminium market: Andy Home

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

By Andy Home

LONDON, April 28 (Reuters) - If you don't like the message, you can always shoot the messenger.

Russian aluminium giant Rusal (HKSE: 0486.HK - news) doesn't like the aluminium price. And why would it?

The London Metal Exchange (LME) three-month price has perked up a little over the last week or so but at a current $1,860 per tonne is historically low and barely changed from the start of the year.

Even (Taiwan OTC: 6436.TWO - news) worse from a producer's perspective, the previous lifeline of high global physical premiums is rapidly sinking as well. Premiums are in free fall in both Asia and Europe and looking decidedly wobbly in the United States.

ADVERTISEMENT

The problem, according to Vladislav Soloviev, Rusal chief executive, is all those speculators operating on the LME.

Their actions, he claims, have depressed the LME price by as much as 30 percent relative to the "real supply and demand balance". ("Rusal battles LME on aluminium price," Financial Times, April 28, 2015).

The solution, in Rusal's view, is more transparency on what the money men are up to.

Rusal is singing from the same song-sheet as its U.S. peer Alcoa (NYSE: AA - news) , which led the original calls for the LME to introduce a U.S.-style Commitments of Traders Report and, once it had done so, urged it to add more detail, specifically about investment players.

Transparency, we can all agree, is a very good thing on any commodity market. However, transparency alone is not going to resolve the market forces driving the global aluminium market.

CHINESE PRODUCTION UP, EXPORTS UP

Even if Soloviev is right and investors/speculators (delete according to preference) have been punishing the aluminium price, the most pertinent question might be why?

The answer, presumably, is they see no particular reason to be bullish about aluminium's prospects in the short term.

This is not a problem with demand. Aluminium's usage profile is still among the strongest of any of the industrial metals.

Rather, just as it has been for many years now, the problem is about supply.

Global aluminium output grew by 5.6 percent in the first quarter of this year, according to the International Aluminium Institute (IAI).

Most of that increase was down to China, also extending a multi-year theme.

The market once shrugged off what was happening in the Chinese parallel aluminium universe but that's getting harder to do as metal in the form of semi-manufactured product continues to wash out of the country into the international market-place.

China exported 1.07 million tonnes of such products in the first quarter of this year, representing a year-on-year increase of 353,000 tonnes.

The pace has slowed since December, when almost 500,000 tonnes left China. That now looks like an outlier month with exporters rushing to beat rumoured changes in the preferential tax treatment of semis.

But exports are still running extremely strong and rather than clamping down on the trade, the Chinese authorities have just removed tariffs on non-alloyed rods and bars, potentially adding to the flood.

The outbound flow, it seems, is going to continue, just as long as the trade remains profitable.

RUSSIAN PRODUCTION UP, EXPORTS UP

Producers such as Rusal and Alcoa try and play down the impact of this Chinese export flow but it must nevertheless be galling that any market deficit created by successive rounds of smelter curtailments is being swamped by metal from the least disciplined part of the global supply chain.

But oversupply is not just a Chinese matter.

Production outside of China has been creeping higher as well, to the tune of an annualised 650,000 tonnes over the last five reported months.

In part this is capacity creep, particularly in Europe, where several seemingly doomed plants have arisen phoenix-like under new ownership.

In part, though, it is also down to new smelters. Alcoa currently has around 740,000 tonnes of capacity off-line, a figure that may increase as it works through another review of its smelter portfolio.

Those curtailments, however, have been completely offset by the ramp-up of the company's new Ma'aden joint venture plant in Saudi Arabia.

And now it is Rusal's turn. It too has taken the axe to its higher-cost smelters but is preparing to fire up its 600,000-tonne per year Boguchansk plant in Siberia, albeit at reduced speed.

For both companies such new plants reduce production costs and boost efficiencies, but they don't help very much a market struggling to right itself after years of chronic over-production and an associated build in stocks.

Another uncomfortable fact for Rusal is that it isn't only Chinese exports that have been booming recently.

Russian customs figures show the country exported 558,000 tonnes of aluminium outside the Commonwealth of Independent States in January and February. That represented a 44 percent increase from the 387,000 tonnes exported in the same two months of 2014.

It's worth recalling that the first cracks in the global physical premium structure appeared at the start of this year in Europe.

To what extent accelerated outflows from Russia helped crack the premium dam is a moot question, particularly since investors have lost their appetite to finance all that surplus metal.

PREMIUM MACHINE BECOMES DOOMSDAY MACHINE

Stocks financing has been the saving grace for aluminium producers ever since the global financial crisis, overlaying manufacturing demand with financial demand.

The profits of the trade, however, have evaporated as the LME forward curve has tightened. Where once stocks financiers could capitalise on seemingly limitless contango, now the front part of the curve is backwardated. The benchmark cash-to-three-months period was valued at $9.75 backwardation at Monday's close.

In truth the original dynamics of the trade, making money from the difference between the curve and the costs of storage, disappeared some time ago to be replaced by what was in essence a punt on premiums going ever higher.

But not only are they not going any higher, they are falling at an accelerating rate.

The United States is the last hold-out but for how long is now the key question.

The CME's aluminium premium contract, indexed against Platts' assessment of the U.S. Midwest market, is currently trading around 16.7 cents per lb, equivalent to $368 per tonne.

But that's only for the spot month of April. Look forward a couple of months to July, say, and the premium is trading at just 12 cents per lb, or $265 per tonne.

With no profit to be made from conventional contango financing and premiums spiralling downwards, the seemingly unstoppable premium machine risks going into complete melt-down.

Rusal may not like those nasty money-men depressing the price of LME aluminium but it should thank them for financing all that unwanted metal for so long.

Without them doing so, things are going to get very tough in this market.

But then that's what the price, both on the LME and in the physical market, has been signalling with ever greater intensity for some time.

It's an ugly message for producers everywhere. Shooting the messenger, however, won't change the message one little bit. (Editing by Gareth Jones)