By Michael Montgomery—Exclusive to Aluminum Investing News
Analysts at Harbor Intelligence’s Annual ‘Aluminum Outlook Conference’ are predicting stable to higher aluminum prices on the year. Despite high inventories of aluminum in warehouses, the analysts agree that demand growth and a looming supply issues in China will move the price higher. A poll of conference participants showed that 75 percent of respondents expected prices to average upwards of $2,600 per tonne in 2012, a majority also concluded that the regional premiums would increase.
Jorge Vazquez, founder and manager of Harbor Intelligence, had a more positive outlook forecasting prices to be above $3,000 per tonne on in 2012.
In his presentation at the conference, Vasquez laid out strategies to forecast aluminum prices. The key highlights included Chinese inventory levels, the effect of Chinese coal/energy prices, as well as gauging warehouse inventories through cancelled warrants.
China has been struggling with high energy costs. In April the Chinese government capped annual output capacity growth rate for 10 nonferrous metals, including aluminum, at 8 percent in an effort to reign in power usage. The production of aluminum is an electricity intensive process, using more than 15 Megawatts of power to produce one ton of the metal. The majority of the nation’s power supply comes from coal fired plants therefore, Vasquez argues, the coal price is a key indicator of price.
“As prices fall below Chinese cash cost – LME is trading at $2500, while China cash cost is a bit more than $2600 – it is not unreasonable for the Chinese industry to be 60-70 percent underwater,” said Vasquez.
The world’s cash cost for producing aluminum is far less, around $1,800 per tonne. As a result, Vasquez stated that China could potentially become a net importer of the metal. Other speakers confirmed his prediction. Michael Lewis, head of commodity research for Deutsche Bank, stated, “if energy prices remain high, power constraints in China intensify and aluminum imports accelerate.”
Power supply issues are a major concern for China this summer. The country is undergoing the worst power cuts since 2004, and has instituted rationing for industrial users. These shortages will likely affect earnings at CHALCO (HKG:2600), China’s largest aluminum producer.
“As we expect further electricity cost inflation while aluminum prices should be capped by high inventory levels in LME, we see Chalco’s earnings at risk,” noted Macquarie analysts.
The high inventory of aluminum has worried many market participants; however, the price continues to rise. Vasquez pointed to cancelled warrants as another prime metric to forecast price. Around 12 percent of the total LME inventory is composed of cancelled warrants. When these warrants spike, it means demand is high, and the future price will rise. Aluminum stockpiles have fallen every day in June and were down 12,950 tonnes today.
To finish his outlook on inventory levels, Vasquez urged that it is important to look at consumption levels over nominal inventory data. “It could cost you millions of dollars,” Vazquez said with no hint of hyperbole.
Detroit LME Warehouse
Beverage industry behemoth Coca-Cola has alleged that Goldman Sachs is manipulating the price of aluminum through its Detroit warehouse. The Detroit warehouses hold 25 percent of LME’s total inventory.
“Coke is accusing Goldman of limiting the supply that is leaving its warehouses, trying instead to increase stockpiles and artificially boosting the prices that producers can charge. In short, Coca-Cola is accusing Goldman of hoarding and manipulating aluminum prices higher,” reported Daniel Dicker, for The Street.
Goldman only allows the minimum amount to leave its warehouses, 1,500 tonnes per day, creating supply bottle necks. According to Coco-Cola’s strategic procurement manager, Dave Smith, “It takes two weeks to put aluminum in, and six months to get it out… The situation has been organized artificially to drive premiums up.” It seems that Goldman Sachs has picked a big fight, as Coca-Cola may have enough clout to force rule changes.