Chinese lethargy in smelter capacity use hits world aluminium

National Aluminium Company Chairman Ansuman Das is spot on when he says the grave Euro zone concerns refusing to go away and the sustained world overproduction, caused particularly on account of China, are standing in the way of the white metal crossing and staying above $2,000 a tonne. In a distressing market like the current one, the premiums on aluminium, depending on how big these are for a quarter, bring some relief to metal producers. Premiums are loaded on the benchmark aluminium cash prices on the London Metal Exchange for buyers to secure physical metal. If it is China whose production volume will have a major bearing on aluminium prices, the premium rates are very much linked to Japan, being Asia's largest importer of the metal.

Premiums for the current quarter for sales to Japanese buyers got shaved by $10 to $240-250 a tonne from the final quarter of 2012 as slowdown in the automobile and electronics sectors and disappointing exports are pointers to Japan to grow, according to Economist Intelligence Unit (EIU), one per cent this year. No less discouraging for the entire metal family is the EIU projection of negative growth of 0.2 per cent in 2013 for the Euro area. Once again, the props to the global market will come principally from China, expected to grow 8.5 per cent, and to lesser a extent from India and some other Asian countries. No doubt, the working of a larger number of smelters would have become unviable had not the premiums stayed at lofty levels. Some fall in the current quarter notwithstanding, large aluminium stocks locked up in financing deals facilitated by a low interest regime and warehousing charges saw premiums appreciating $133 a tonne from 2012 first quarter.

Das says aluminium has become a particularly sensitive commodity, most of the time reacting to political and economic developments with global ramifications faster than any other metals. But why is the LME three-month aluminium price staying this low? "Weaknesses in aluminium fundamentals alone will not give you a clue to the poor price behaviour of aluminium. You also have to consider the broader market factors," says Das.

According to metals research and consulting agency CRU, a lot of liquidity in recent weeks has moved from commodities to equities and bonds in the wake of brent crude falling by a few notches from $119 a barrel in February on the back of Saudi Arabia's positive announcements about production. As there is appreciation in the value of the US dollar vis-a-vis the Euro, the equity market has sprinted past the 2007 peaks. Aluminium included, all non-ferrous metals have sunk to four-month lows. Copper is down to $7,575 a tonne and zinc on the Shanghai Futures Exchange (ShFE) fell to its lowest in four years.

As a result of production running well ahead of demand, aluminium stocks with LME is about 5.23 million tonnes (mt). Then there are also record stocks of over 1.7 mt in China with ShFE, unregistered warehouses and the State Reserves Bureau (SRB). Macro-economic conditions remain difficult. What's further clouding the price outlook for aluminium is defying low prices, China lifted production by 12.8 per cent to 21.671 mt in 2012 and in the first two months of this year its output was 3.51mt, up 15 per cent year-on-year. High levels of Chinese production are in disregard of signals for restrained output coming from ShFE where aluminium cash prices at a 31-month low are running without a break at below the 100-day moving average since the beginning of this year.

As Das anticipated, SRB came to ease the financial pressure on large Chinese government-owned smelters by buying 300,000 tonnes of aluminium in closed door tenders and paying a premium of 3.8 per cent on ShFE March contract prices. Many have been proved right that beyond benefiting some smelters, the inventory building move by SRB, the second since November 2012, would not change the fundamentals of the Chinese aluminium market.

Whatever their levels of efficiency and technology in employment, low aluminium prices have eroded industry profits across the board. As Rusal, the world's largest producer of the metal, booked a loss of $55 million in 2012, there were hefty writedowns at some other major producers, including Rio Tinto, which to its regret expanded the aluminium portfolio by buying Alcan in 2007 at a cost of $38.1 billion.

Alcan acquisition was one bet that went horribly wrong for Tom Albanese who had to step down as Rio Tinto chief executive officer earlier this year after the company had to write down $14 billion, attributed mostly to its aluminium assets.

The acquisition for which the other contender was Alcoa of the US happened at a juncture when aluminium prices were at 35-year highs and Albanese thought the Chinese demand would take prices even higher. But, who then could foresee that the world would soon be drowned in a financial crisis from which it is yet to recover. So, it is understood why aluminium profits in India are squeezed, too. China having a share of 45 per cent in world aluminium production is harming the industry by not moving fast in resting high-cost grid powered smelters.