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Aluminum pins 2013 hopes on political fortunes

Keywords: Tags  aluminum, aluminum market, 2013 outlook, Suzy Waite

The level of uncertainty shrouding aluminum markets heading into the new year was unprecedented, with some analysts prepared to make two price forecastsÑone if the fiscal cliff issue was resolved, and one if it wasn’t.

President Obama and Congress managed to avoid falling off the cliff, but analysts say that while the political resolution should provide some clarity and confidence to markets that will help aluminum demand and pricesÑBarclays Capital Plc has forecast that the London Metal Exchange aluminum cash contract will average $2,315 per tonne this year, while Davenport & Co. LLC is similarly forecasting a cash price of $2,300 per tonne--there are still issues on the table, such as spending and the debt ceiling, that could hinder the markets further down the line.

“Fundamentals softened up (in the fourth quarter). They weakened more than we figured,” Davenport analyst Tim Hayes told AMM. “We haven’t run different scenarios, but certainly if the ... U.S. economy goes into a recession, obviously aluminum prices will be lower. A recession would cause a sizable cut to our aluminum forecast.”

David Gagliano, director of U.S. metals and mining research for Barclays, said that a number of things have to happen for LME aluminum to hit $2,315 per tonne.

The aluminum price doesn’t have much further to fall from its current range before producers will cut more production; three-month aluminum prices ended the year far below the 2012 high of $2,349 per tonne in late February and below many global smelters’ breakeven points. A number of global aluminum producers--including Alcoa Inc., Norsk Hydro ASA, Rio Tinto Alcan and United Co. RusalÑcurtailed production last year, although the cuts have had little impact on prices. And considering how much capacity China continues to bring online, any additional production taken offline this year will be more than offset by additional Chinese capacity, Hayes said. “We know China’s (net) production went up last year compared to 2011 because they keep adding new capacity that’s more than offsetting any curtailments.”

China produced 21 million tonnes of aluminum in 2012, up from 19.7 million tonnes in 2011, according to Davenport. Increasing Chinese consumption could help prices, but many sources argue that oversupply continues to plague the industry, and unless more capacity comes offline, aluminum prices will suffer.

“Global consumption of aluminum has grown an average of 6.5 percent each year for the past 10 years, yet the price has stayed (fairly consistent),” Gagliano said. “The problem has been, and will continue to be, with supply. We’ve had surpluses for the past five consecutive years.”

John Tumazos of Very Independent Research LLC, Holmdel, N.J., agreed. “China is growing, but not as fast. And the Chinese are expanding production when demand is slower,” he said. “U.S. and European output doesn’t matter. The issue is whether the Chinese expand five, 10 or 15 percent. They are 45 percent of world output, and no one thinks (demand) will grow by 10 or 12 percent (in 2013).”

Warehouses are another piece of the aluminum market’s puzzle. Inventories reached record highs toward the end of 2012, with global warehouses holding 5.21 million tonnes at the end of December.

“I think you have to be worried (about the price) when there are consecutive weeks of record exchange inventories and most regions in the world appear to be slowing,” said Tumazos, who expects the average aluminum price to hover around $1,984 per tonne this year.

The warehousing industry is lucrative for traders, who profit from financing material as long as a contango remains in effect. The phenomenon has pushed Midwest premiums to record highs, and most anticipate the trend to continue this year.

Although there have been some rumblings that Hong Kong Exchanges & Clearing Ltd., which recently acquired the LME, might change load-out rate rules, few expect any actual changes. “Let’s say they change the load-out rates to 1,500 tonnes per day per warehouse in Detroit. Not per location, but per warehouse. Where are they going to find the trucks?” one trader said. “It won’t happen unless you want to take trucks from the Southwest and leave the produce down there. They cannot physically do it.”

Although consumers have complained about the warehousing situation, traders argue that the warehouses are propping up the aluminum price at the moment; if material currently stored in warehouses suddenly flooded markets, prices would plummet and smelters would shut down.

Sources are reasonably optimistic about demand for specific end markets, including aerospace and automotive, which continue to be bright spots. Sources also anticipate a pickup in building and construction, particularly on the East Coast in the wake of Hurricane Sandy.

Pittsburgh-based Alcoa estimates that aerospace manufacturers Airbus ASA and Boeing Co. each have an eight-year order backlog, and Foothill Ranch, Calif.-based Kaiser Aluminum Corp. forecasts that the backlog will increase every year until 2020, creating an effect throughout the supply chain, with service centers reporting mill lead times of up to five months for 2000- and 7000-series aerospace plate.

Increased aerospace demand could impact other alloy production as well. In theory, if aerospace demand stays on course, mills would produce more 2000- and 7000-series aerospace plate and as a result produce less 6000-series plate.

A shortage of 6000-series plate, which is used in a variety of end markets, could occur in 2013, although service centers said it hasn’t happened yet. “We expected (a 6000-series) shortage by now. But it hasn’t happened, which indicates a couple of things: There’s a lot more 6000-series capacity (and) there is a lot more aerospace plate capacity. And even though there’s been a good level of demand for aircraft builders, it hasn’t been at a level that dries up capacity,” one service center source said. “With more capacity, you need a bigger demand level to trigger it. That demand level is out there, no question. It’s just a matter of when it will hit.”

A second service center source said that a true domestic shortage of 6000-series plate is not likely as consumers will simply turn to imports.

However, if mills do not adjust their product mix and continue to produce 6000-series plate, mills run the risk of creating oversupply, a third service center source said. “Demand will be flat (for 6000-series plate). And if anything happens (in the economy) that will go down, in which case there will be too much. We already have plenty of 6000.”

The automotive sector--a major end market for aluminum--is much more susceptible to consumer confidence. Should the markets tank, consumers will stop making large purchases, including vehicles. “If the U.S. goes into a recession and Europe continues to get worse, then you could see automotive demand decline,” Hayes said.

However, market players maintain that two factors--substitutions for steel and replacing older fleets--will support auto aluminum growth in 2013. Davenport has forecast that auto sales will increase 5 percent this year vs. 2012, and, provided aluminum takes a bigger share, auto demand could increase by 9 to 10 percent in 2013.

While many automotive growth forecasts are long-termÑestimates are that vehicles will carry an average of 550 pounds of aluminum by 2025, up from 343 pounds todayÑa number of automakers have already begun to shift toward the lightweight metal in their manufacturing.

Dearborn, Mich.-based Ford Motor Co. reportedly is planning to use a predominantly aluminum body for its new F-150 pickup truck, while Chrysler Group LLC, Auburn Hills, Mich., and General Motors Co., Detroit, likely will follow suit in their own trucks.

Building and construction is another area that showed signs of life as 2012 came to a close, particularly in the wake of Hurricane Sandy. Both Davenport and Barclays are forecasting upticks in building and construction this year, with Davenport predicting a 5-percent increase in 2013 compared with a 4-percent increase in 2012.

“In our little domain of Hurricane Sandy, rebuilding is kicking up. I personally think things are looking really good,” a second trader said.

A consumer agreed, noting that on top of decent demand from aerospace, automotive, and building and construction, consumer spending is up--always a positive sign. “I think the first quarter looks strong,” he said.

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