Prices of Aluminium have plummeted by 33% since July and are now nearing November 2007 levels. The fundamentals are still bearish for this base metal. Global recession, Shortage of liquidity for working capital and rising Inventories across exchanges will all pressurize the prices further to test lower levels.
Aluminium is the most widely used non-ferrous metal. Aluminium plays a very vital role when it comes to Fuel efficiency of Vehicles. By reducing the vehicles weight, it cuts down on fuel consumption and emissions without compromising the size or the safety of the vehicles. Aluminium also facilitates the construction of corrosion-resistant and low maintenance buildings.
News of major plant shutdowns in China and short covering offered Aluminium its limited support. After the crash in Aluminium prices major plants across the globe have came below the break even of production, this lead to shutdown in smelters. Demand prospects are still poor and smelters are cutting back on capital investments due to the global financial turmoil. China's top aluminium maker, Chalco announced that it might have to cut output because of weak prices, signaling that other producers in the world's biggest aluminium consuming nation might also struggle to keep their high-cost capacity running and follow suit. Chalco third-quarter profits plunged by more than half because of higher costs and lower demand and product prices. China's largest makers of the metal agreed to slash output more than a 10th from August because of power shortages.
The collapse in global car sales in the US and now the EU will shrink demand this year and in 2009 as well to keep Aluminium prices on the knees. September was the worst month since 1993 in US with Auto sales dragging down below a million. A plethora of bad economic news drove a sales decline for every major automaker as total light-vehicle sales tumbled to 964873, down 26.6% compared with September 2007, sales.
U.S. auto sales for October are expected to tumble about 29% to their lowest level in nearly 17 years. October sales are expected to drop 9.4% from September. This is an expectation of one of the renowned online resource for automobile Edmunds. In European Union the car sales fell for the fifth consecutive month in September, the longest stretch since 2005, as higher fuel prices and financial-market turmoil reduced demand.
Aluminium didn’t enjoyed the bull face seen in other metals much and so it is not surprising that it hasn’t suffered with same margin. However, it is not immune to the global economic slowdown. Slower economic growth and the global credit crisis are undermining demand for property and automobiles, which require aluminum. One third of the global capacity is operating at a loss at current LME prices. Inventories of Aluminium are at their four years high at 1528400 per tonne. Additional bearish pressure to aluminum pries is huge buildup in Shanghai inventories of 204407 tons as on 24th Oct 2008.
LME Inventories data suggests that there has been a huge build up in inventories since the start of the year. Aluminium inventories which were 929450 tonnes in 2nd January 2008 are now at 1500150 tonnes on 23rd October 2008, marking an increase of 61%. During the same period the number of cancelled warrants has gone down by 43% to 15850 tonnes as against 27775 tonnes now. Cancelled warrants are the amount to be taken out of the warehouse.
The increase in LME inventories is more a movement of existing stocks into LME warehouses (movement of off-warrant to on warrant) rather than the result of oversupply. Around the world, Banks are requesting aluminum investors to move their aluminum stocks into LME warehouses in order to use the warrants as more secure collateral. In other words, it has more to do with financing deals between banks and investors.
The increase in LME inventories is more a movement of existing stocks into LME warehouses (movement of off-warrant to on warrant) rather than the result of oversupply. Around the world, Banks are requesting aluminum investors to move their aluminum stocks into LME warehouses in order to use the warrants as more secure collateral. In other words, it has more to do with financing deals between banks and investors.
As per International Aluminium Institute (IAI), world production growth in aluminium has increased in first nine months of 2008, to 19243 thousand as against 18428 thousand tonnes. Major growth was marked in West Europe of 8% to 3476 thousand tonnes in Jan-Sep 2008 period as against the corresponding period previous year. Asian registered a growth of 5.7% while North America and Latin America registered growth of 4% and 4.6% respectively.
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In domestic futures markets the prices have also been bruised badly by the demand outlook and liquidity problems. The prices on MCX from hereon are looking to touch Rs 93 and 84 levels in the medium term from where recovery due to bottom fishing is likely to emerge. Around half of the Aluminium industry is now operating at a loss, and Chinese plants, which have the highest costs, have announced reductions.
In the first half of 2008, disruptions to electricity supplies in China, South Africa and New Zealand resulted in reduced availability of power and lower than expected growth in aluminium production. This was a key driver of the 2 per cent increase in aluminium prices in the first six months of 2008, compared with the corresponding period in 2007. However, the United States and Europe, motor vehicle production and housing construction account for a large proportion of aluminium consumption. The US housing market is expected to remain weak, contributing to lower aluminium demand. And this will suffice the power problems experienced by major producing countries. Inventories levels are already at 4 years high which will be pressurizing the prices.
