Industrial metals prices trading on the London Metal Exchange were shaken this week by an unexpected slowdown in Chinese growth, followed by gloomy indicators in the United States, which cast doubt on global growth strength.
Stuck in a pattern of structural oversupply, Barclays Research forecasts the price of aluminum to stay around 2,000 dollars per ton. It has tested several alternative scenarios to try to understand how the light metal market will evolve.
Despite ever more abundant surplus, producers have not taken adequate measures to balance the aluminum market. The surplus reached 889,000 tonnes in 2011, 1.5 million tonnes (Mt) in 2012 and expected to peak at 1.8 Mt in 2013. In this context, the average price of aluminum has fallen year on year by 16% in 2012 to 2,017 dollars per tonne, its lowest level since 2009, when it collapsed under the impact of the financial crisis.
While the above fundamental narrative is a simple one, it belies a number of significant distortions that mean the metal is “generally viewed in far more uncertain terms by market participants in 2013″ than it would be otherwise.
As we were mentioning in Aluminum: China is running out of bauxite, in May, Indonesia asked all mining companies to either build their own processing capabilities locally or partner with companies able to do so, knowing that by 2014, exports of raw minerals, including bauxite, would be forbidden. Indonesia‘s goal is to derive more revenue from its mining sector.
Addicted to Indonesian bauxite, Chinese aluminum companies need to diversify their sources of supply or develop local production. Eventually, this supply issue should lead to an increase in China aluminum imports.
A parallel can be drawn with bauxite. Over the last 5 years, ever-increasing volumes of bauxite have been imported to feed aluminum refineries in China. The aluminum companies have decided to refine bauxite themselves rather than buy aluminum because of significantly lower investment costs in China.
Copper’s average will fall from $3.60 a pound this year to $3.20 a pound next year when supply and demand will be in balance after a shortage this year, Peter Hickson, an analyst at the bank, said in a report dated today. Nickel will strengthen throughout 2012 and average $8.98 while zinc falls from $1.03 a pound this year to $1 a pound next year, according to the report.
Three-months aluminum fell as far as $2,054.75 a metric ton on the London Metal Exchange Monday, the lowest level in 14 months and down 27% from the May peak of $2,803 a ton.“As a result, increasing numbers of aluminum smelters are becoming unprofitable and are temporarily shutting down production.”
Aluminum prices have fallen below the cost of output for many producers, creating a scenario in which global production may suffer in the months ahead if prices do not recover. Like other base metals, aluminum has tumbled from its highs earlier in the year on worries about the strength of the global economy and thus potential industrial demand, particularly as the European sovereign-debt crisis continues.
The biggest decline in aluminum prices since the global recession means at least 25 percent of the world’s smelters may be unprofitable.
The metal fell 23 percent to $2,125 a metric ton on the London Metal Exchange since May 1 and energy costs gained 12 percent in the past month.
Twenty-five percent of production loses money below $2,350 and 50 percent under $2,000, according to estimates by Bloomberg Industries. About 10 percent of output may be shut by the first quarter, said Jochen Hitzfeld, the analyst at UniCredit SpA in Munich ranked by Bloomberg as the most-accurate price forecaster over two years.
Reuters reported that the US primary aluminum market is seeing a surprisingly strong burst in spot purchases at the start of the quarter with supplier order books filling up even as volatile financial markets dispel recovery hopes.
The demand pickup has caught physical market players by surprise many of whom expected the seasonally slower Q4 to close out 2011 with a whimper. So far it is shaping up to be a busier than normal quarter.
Makers of automobiles, air conditioners and industrial components are increasingly turning to the much cheaper metal to help offset rising cost pressures as the global economic recovery gains steam.
The difference between the prices of copper and aluminum is now enough to cover the costs of retooling some manufacturing processes and pay for the extra aluminum it takes to conduct the same amount of electricity as copper.
“There is a lot more engineering and development activity as these companies think about how to replace copper with aluminum,” said Charles Belbin, spokesman for Atlanta-based aluminum producer Novelis Inc., a unit of India’s Hindalco Industries Ltd.
Markets ripe for the switch include wiring for automobiles and buildings and evaporator and condensing coils used in commercial refrigerators.
China’s manufacturing expanded last month, according to data from the country’s logistics federation and a purchasing managers’ index from HSBC Holdings Plc and Markit Economics. Global economic growth of 4 percent this year and next will mean similar gains in industrial-metals demand for both years, led by increases for aluminum and nickel, Credit Agricole SA said.