Summary
The hypothesis being discussed lately in the aluminum market is that the still large inventories will temper the price rally underway. While LME inventories are large by historical standards, most of these inventories are tied up in financial deals which will be slowly unwound over time. In addition, inventory levels in days of supply are coming down as demand is rising around the world and recent major market events will reduce the supply-demand imbalance going forward.
Analysis
As of August 17, 2009, LME stocks stand at 4,551,600 tons, which is down 4% from the highs earlier in the year. COMEX stocks in New York are down 10% from earlier highs. While the total inventories are still high historically, the majority of the tonnage is tied up in financial deals and not available for release to the market in the near future but likely to be slowly unwound over time. In addition, as demand has turned up, these inventory levels in terms of days of supply have been actually decreasing.
China has been importing significant tonnage because of shortages evidenced by the several hundred dollar per ton premium for metal on the Shanghai Futures Exchange compared to the LME. This premium has recently disappeared as smelter restarts have begun to supply the internal deficit in China. China has shown great discipline this year in not flooding the world with excess production and is expected to remain in balance for this year.
We learned just yesterday of the major power dam accident in Siberia at the Sayano-Shushenskaya power station, one of the five largest power dams in the world, that will affect the output of two aluminum smelters which are owned by UC Rusal in the area (Sayanogorsk, Khakas). Current assessments are that as much as 500,000 tons or more of output will be lost despite arrangements made to receive emergency power supplies from neighboring regions of Krasnoyarsk and Kemerovo. UC Rusal has stated that they are relying on reserve capacities which are only a temporary solution to the problem, according to a spokesman, and that securing long-term power supplies will not be resolved in the near future and there will be a serious threat of a reduction in production volumes. Initial estimates are it will take two to three years for the power station to return to normal (Mineweb - Reuters Aug 18th).
This output reduction will go a long way to help bring the global aluminum market toward balance and is likely to spur further increases in metal price beyond the current $2,000 per ton and toward $2,400 per ton over the next couple of months, despite the current overhang of inventories on the market.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
