Commodities | Mar 31 2009
By Chris Shaw
As with most commodity prices aluminium has enjoyed some price gains in recent weeks but in the view of Barclays Capital these gains are simply not justified given the record and still increasing stockpiles of the metal. Barclays analysts suggest unless there are additional production cuts it could in fact take years for the market to recover to some sort of balance, with prices to remain under pressure until that balance is achieved.
There is a long way to go to achieve such a balance as on GSJB Were’s numbers the global market recorded a surplus of more than two million tonnes of the metal last year. While the stockbroker expects the magnitude of this surplus to shrink in coming years, the market will nevertheless continue to be oversupplied through 2010.
This removes the chance of any pricing tension in the meantime as not only will there be market oversupply but substantial idle capacity that can be started up anytime prices appear to be firming or demand picks up. Barclays suggests there needs to be further price cuts in the metal to force the necessary production cuts as at current levels the production cuts appear to have largely stopped.
Barclays analysts also point out Chinese production appears on the verge of increasing as recent price gains have prompted some smelters to re-start, this at a time when global demand is likely to fall further given the extent of the global economic downturn.
In the view of Barclays, 2009 will be the worst year for European consumption since the mid-1990s, while North American consumption is forecast to be down a little and in Japan by as much as 15%. China is not coming to the rescue as on the group’s numbers the country’s consumption should be relatively flat year-on-year in 2009. GSJB Were is even more bearish, forecasting a 6% decline in demand for the metal this year, with risk skewed to the downside at present.
While the broker expects production cuts will flow through in response to the weaker demand environment, and current evidence suggests a number of projects are now being reviewed and several have been delayed, the supply cuts won’t be enough to stop the market from remaining in surplus this year.
Of course demand will eventually recover and GSJBW sees this happening in 2010, but when it does the problem becomes one of working through the sizable stockpiles of the metal, which Barclays argues will keep prices capped for some time. To reflect this, the group is most bearish on aluminium among the base metals, a view shared by GSJB Were.
In terms of price forecasts, Barclays Capital expects the aluminium price will average US65c per pound this year, with only in the December quarter prices expected to be higher than this level at an average of US73c per pound. GSJB Were forecasts an average price this year of US64c per pound, which should mark the bottom of the market in its view.
A gradual recovery should see prices average US70c per pound in 2010, while assuming rising power production costs (a large element of the cost of producing aluminium) leads GSJBW to suggest prices will improve somewhat more aggressively from 2011-2013. Its average price forecast for 2013 currently stands at US94c per pound.