Each Quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Oct 2015.
Below is the aluminium report, to read the full report covering all the metals in pdf form click here.
Subscribers have access to these reports before they are published through the research tab in FastMarkets Professional.
Aluminium – Stock overhang needs addressing
Aluminium prices remain in the doldrums while oversupply and high stockpiles overhang the market. Prices have managed to get some lift off the recent low of $1,506 per tonne thanks to some output cuts. The physical market remains weak; we would expect some pick-up after the summer slowdown but we feel any rallies will be sold into. The danger is that the cuts trigger a rally that dissuades producers from making further reductions and encourages more capacity to be brought on line. We feel it will be necessary for prices to fall further to force more cuts, thereby creating a lasting deficit so that stocks can be drawn down to working levels.
Overall trend – Aluminium prices have been trending lower since May and short-covering rallies have tended not to last. Prices have fallen to a low of $1,506 per tonne, well into the production cost curve, but little output has been cut yet, although there is still talk of more reductions inside and outside China. Another short-covering rally was triggered in late August and was considerably stronger than the others, with prices rallying 9.9 percent or some $150 to $1,655.50. Prices seem to have overshot on the downside – the fallout from China’s currency depreciation, which affected most asset classes, seems to have been the reason. So the stronger-than-normal rebound is not so surprising, especially since money managers had built up a large short position on the LME. With some signs of producer restraint and considering how low prices have fallen, we would not be surprised if prices move to higher ground to consolidate for a while but we feel the risk of more off-market stocks finding their way back to the market remains, which will ultimately send prices lower until more cuts are made.
Production shows signs of falling – Global aluminium production in the first seven months of 2015 averaged 158,086 tonnes per day (tpd) compared with 143,300 tpd during the same period in 2014, according to the International Aluminium Institute (IAI). But while output has continued to rise at a fast pace, equivalent to 10.3 percent so far in 2015, July’s pace of 158,700 tpd was down from 163,400 tpd in June. More noteworthy was that Chinese production fell to 87,871 tpd from 91,867 tpd in June. China is the main culprit in raising global output; a drop in its output would be a major plus for the fundamentals, although the negative is that stocks are too high. And with Century Aluminium announcing the closure of its 255,000 tpy Hawesville smelter, Alcoa reviewing 500,000 tpy of production, Rusal reviewing 200,000 tpy, Vedanta slowing the ramp-up of new capacity in India and China also making cuts (although it continues to bring on new capacity too), the market is moving in the right direction. Still, more needs to be done if a meaningful supply deficit is to be created, one that is big enough to start chipping away at the stock burden.
Chinese exports edge lower – China’s exports of unwrought aluminium and products have fallen since the June peak of 450,000 tonnes – they dropped to 360,000 tonnes in July and 340,000 tonnes in August. In the first five months of the year, exports were running 34.4 percent above year-ago levels but for the first eight months they are now running 22.3 percent above year-ago levels. Lower premiums and outright prices seem to have reined in exports but the level of Chinese exports is likely to remain an important swing factor. If Chinese exports do not rise, the world outside China is likely to find itself in a deficit, which will help reduce stockpiles. But if prices rally because of lower exports from China, its exports are likely to pick up again.
Demand likely to remain robust – The demand side of the aluminium market is not causing the price weakness – it remains one of the metals with the fastest-growing demand profiles. We expect this to continue and even expand.
LME stocks trend lower still – LME stocks continue to fall, reaching multi-year lows, and new LME load-in-load-out rules may see this trend accelerate. It would be ironic if falling stocks prompt algo trading systems to get bullish since most of the stocks are thought to be going into off-market financing.
Prices – The downward trend in aluminium prices dominates. While there has been a counter-trend rally recently, prices are once again heading lower. The existence of massive levels of stocks, perhaps as much as 13 million tonnes, means the market needs to correct its imbalance; lower prices seem the only way forward. We would look for them to drop to $1,400 in 2016, but to trade in a $1,500-1,670 range in the fourth quarter.
The far-forward spreads have moved further into contango, which suggests possible forward buying, but the nearby spreads have diverged while tightness around the October date manifests itself.
LME aluminium stocks are falling at a steady pace, averaging 5,800 tpd so far this year. Cancelled warrants as a percentage of total stocks stand at 37 percent, down from 56 percent at the start of the year.
The pace of warrant cancelling has slowed, which suggests the fight to keep exit queues extended and premiums high has been lost. The tightness in the spread may lead to a pick-up in rewarranting of cancelled warrants, which could ease the tightness.
Physical premiums stopped falling for a while but the October backwardation is now prompting stockholders to sell – the backwardation is likely to boost availability in the physical market while metal struggles to be financed.