Aluminium: Chinese supply to outweigh demand

Aluminum has been characterized by growing stocks and rising production for much of 2009, while demand has remained weak everywhere besides China. But now there are hints of improving demand, with physical premiums on the rise and orders for and shipments of aluminum in the US improving.

LME warehouse stocks have also declined modestly but steadily since mid-September, falling 2% to 4.58 Mt as at 19th October, while cancelled warrants are more than 90,000t, as at 16th October, implying that further metal might be due to leave the warehouses. Will this turn out to be the beginning of the long awaited restocking phase - who knows? Maybe it could even be an indication of recovery in real demand - then the aluminum price could strengthen yet further, since immediate metal availability is limited due to much of it being held in term financing deals or off-market.

The improving mood was voiced by Alcoa, which estimated that demand would improve by 11% in 2H 2009, not excluding restocking of working inventories of end-users. It also said that it is seeing modest sales increase in global truck and trailer and automotive segments for the second half, while at the same time putting up prices by 2% on alloy coil and flat sheet items.

This is price supportive, but could be undermined by the rapid rise in production capacity, mainly in China. Although the differential between the Shanghai price over the LME price has remained steady at $300/t-$390/t, suggesting that Chinese demand is robust, in our view a tipping point will be reached before long, where Chinese supply will soon outweigh demand and prices will need yet again to correct. This risk will be even greater if smelters in the rest of the world restart idled capacity; but at current prices of $1,800/t- $1,900/t the temptation to do that will be strong.

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