Aluminium: China Pressing Stockpiles

Aluminium prices kept rolling forward in the first three weeks of April on account of strong demand prospects from the Chinese industry. The metal witnessed torrid times in 2008,falling in tune with the other base metals and prices were depressed till February 2009. However, from thereon, the news of buying from Chinese State Reserves Bureau (SRB) harmonized the prices. The inventories have been piling up in LME and it is expected that even if the demand emerges from China the multi year high inventories levels will be keeping the lid on the prices. Australian Bureau of Agricultural and Resource Economics (ABARE) in its recent report has forecasted Aluminium prices to average at $ 1400 per ton in 2009 down by 49 percent from the 2008 average of $ 2487 per ton.

Vehicle Sales Demand Under Pressure In Western World

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.
The collapse in global car sales in the US and Europe has been a cause of concern. For March, US Auto sales dropped 2.3 percent after declining 3 percent in February. Auto sales for March 2009 were 23.5 percent below the year-ago level. In Europe, the latest reported New registrations of commercial vehicles dropped by a record 38.7% to 129580 units in February. The sharp downturn affected all vehicle categories and all countries. Registrations declined by 38.1% in Western Europe and by 44.0% in the new EU Member States.

Amid the squeeze in Vehicle sales market, Chinese data contradicted the numbers from the western world. Vehicle sales in China hit a record in March due to the assistance from the government on tax front. China's auto sales hit a monthly record of 1.11 million vehicles in March, exceeding US sales for the third month in a row, as tax cuts and rebates for small car purchases lured buyers back into showrooms, according to industry figures. China is bound to eventually overtake the US as the world's largest auto market and recent developments have accelerated that trend.

Buying Of Strategic Reserves From China

The rise in Aluminium prices is more of a rally from Chinese euphoria rather than any fundamental triggers. China State Reserves Bureau planned to buy 300000 tons of primary Aluminium ingots from eight local smelters. The SRB paid 12490-12500 yuan per tonne for the purchases, part of Beijing's plan to support smelters that were suffering from weak demand. State Reserves Bureau already bought 290000 tonnes in December. The news has already have enough impact on the prices of Copper which has maintained $ 1400- 1500 per tonne range despite the multi year high inventories level.

LME Prices At 4 Month Highs

LME Aluminium kept on ascending all through March and April, from supports of demand refurbishment from China, but the recovery is expected for a short term. In March alone the prices increased by almost 7% to $ 1488 per ton. The rally continues in April as well, with prices touching 4 monthly highs, levels not seen since 16th Jan 2009. However, the ascent of LME stocks has made the rise bumpy. The Aluminium stocks recently tested multi year high levels of 3651275 tons. Since the beginning of 2009 the stocks have increased by 57 percent. The stockpiles were 2338300 tons at the start of this year. ABARE expects that World aluminium stocks will reach 8.2 weeks of world consumption in 2009, and 8.5 weeks in 2010. Consumption levels have been falling and therefore the affect of production cuts in the past will not be a key factor till economic recovery is seen.

Global Production Of Primary Aluminium Declines

International Aluminium Institute’s (IAI) latest data for the period of Jan-Fed 2009 states that the World primary Aluminium production declined by 6% to 3.948 million tons as compared to 4.205 million tons during the corresponding period previous year. Overall, Asia produced 0.6 million tons of primary Aluminium in first two months of 2009 a rise of 10% from Jan-Feb 2008. With the exception of Asia, all other regions posted a decline in the primary Aluminium production. North America registered the worst decline of 13% due to lower demand from Aluminium consuming sectors.

Indian production of primary Aluminium in February stood at 114799 tons surpassing the production target of 103259 tons by 10%. Cumulative production for the period of April-Feb 2009 was 1223216 tons as against 1128852 tons during the corresponding period previous year, marking a rise of 8%.

Writer's Comment:

In domestic futures markets, the prices were bruised badly by the demand outlook and liquidity problems before the recent global up turn revived the sentiments. However, the rally is unlikely to extend further and we may witness a corrective dip soon. The prices for MCX April contract are looking to touch Rs 66 levels in the coming weeks from where recovery due to bottom fishing is likely to emerge.

For global Aluminium industry, high cost of production in 2008 has eased considerably due to fall in energy prices. However the real question of demand emergence remains. 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 for some more time before any real retrieval is witnessed and this will be contributing to lower aluminium demand. Inventories levels are already at multi year highs, which will be pressurizing the prices.