Industry Info

Aluminium drifts lower on Fed taper doubt

Aluminium prices drifted lower on Tuesday along with other base metals as uncertainty about when the US Federal Reserve will start “tapering” its bond buying programme weighed on the market.

Aluminium for three month delivery on the London Metal Exchange eased 1 per cent to $1,799 a tonne – barely half what the metal fetched at its July 2008 high.

Analysts expect aluminium, used to make aircraft and fizzy drinks cans, to remain in the doldrums even if demand for the light metal remains robust. This is because of chronic oversupply.

China, the world’s second largest economy, is the largest consumer and producer of aluminium. According to Credit Suisse, China’s annualised production rate hit 24.9m tonnes in August, putting it on track to produce more than 25m tonnes for 2013. That amounts to half the world’s production of the light metal.

Few commentators or industry participants expect China to rein in production, except for closing inefficient plants while opening new, more cost-effective ones, largely in the country’s northwest where hydroelectric power is cheap.

Instead, the brunt of the supply cuts is likely to fall in Russia and Europe. Indeed, Rusal, the world’s largest aluminium maker, which has cut its own production 7 per cent this year, does not expect Chinese smelters to follow suit.

The Russian company forecasts Chinese output to reach 28m tonnes a year two years hence.

Standard Bank’s Leon Westgate similarly forecasts Chinese output to grow at 9 to 10 per cent per year, and total global supply at 6 to 7 per cent.

There are other risks for smelters, including whether demand can match the expansion of supply. While China - half the world market on the demand side as well - is roughly balanced between consumption and production, Credit Suisse analysts warn that “[any] lull in China’s hitherto relatively robust aluminium demand could see the metal under renewed downward price pressure”.

Another risk is that a drawdown of warehoused LME stocks flood the physical market.

Meanwhile, the possibility that Indonesia, a large exporter of bauxite, implements a planned ban on unrefined ores exports threatens to lead to higher input prices and lower margins for aluminium smelters.

According to one trading house analyst, however, “the general consensus” is that Jakarta will not impose a ban in 2014. “Next year is an election year and no one wants to rock the boat.”

He added that the government needed the tax revenues exports generated: “They need to fund the fuel subsidies which again no one wants to change in an election year.”

Source: Financial Times