Metal Matters: Aluminium, Lead And Nickel

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-Deutsche sees alumina at US$374/t this half
-Concerns over excessive aluminium stocks
-Lead to soon end its run
-Nickel heading into surplus, prices to become volatile

By Andrew Nelson

Deutsche Bank notes alumina prices have been on a bit of a run over the past few weeks, with the market now expecting a pick-up in global demand, compounded by constraints on production. The broker is happy to buy into the former assumption, but sees the latter as just not being the case.

While many have been expecting Rio Tinto ((RIO)) to shut down the underperforming Gove alumina refinery, recent commitments from local government for energy assistance means the 2.75mt facility will now stay open. The economics of the plant remain poor, says Deutsche, but it speculates Rio may want to keep the plant running if it does decide at some point to sell its aluminium business. A better price would certainly be achieved for a fully operational and integrated unit than would be for a mothballed asset.

Yet while the broker admits this is likely to have at least a short term impact on alumina prices, the broker does see a few things that could lead to higher prices in the medium/long term and beyond.

Indonesian bauxite exports remain well below the levels seen before the export ban. New Indian smelters are being commissioned, which are expected to require increased bauxite/alumina imports. The Chinese are also adding smelters, which the broker estimates will be quite reliant on imports.

Lastly, over the past little while all we’ve seen is cost cutting, scale backs, retrenchments, deferrals, cancellations and write-downs within the aluminium space. There is little fat left. Starved of capital, there is thus little scope to quickly address any sort of significant lift in demand. Supply tightness will ensure at some point and then around the circle we go again.

Deutsche’s long-term estimate for alumina is at US$400/t, with the broker expecting that the spot price could reach US$375/t in the first half of this year. Macquarie’s view stands in sharp contrast, the broker increasingly worried about oversupply. While production was broadly flat month on month from December to January, the trend is still rising, the broker notes, with total global output up 7% in January year on year thanks tom a big lift from China.

The broker expects to see further substantial increases in primary aluminium production over the course of the next year and beyond. Some is due to the aforementioned build-out of new smelting capacity, mainly in China and India, but also in the Middle East. Macquarie sees this adding to a market already in surplus and sitting on record inventory levels.

Macquarie is also expecting lead to take a rest after a decent nine months, with a period of underperformance now looking likely. Macquarie cites signs the Chinese metal market is in surplus, while global demand is also likely to soften for seasonal reasons in the coming months. On top of that, production is expected to rise.

Lastly, despite a fairly subdued nickel production outlook, analysts at JP Morgan expect the market to head into surplus over 2013 and 2014 on declining refined nickel demand. The broker notes there is a significant amount of new nickel pig iron capacity in China, with most of it demonstrating improved product quality and lower production cost. This is quickly cutting the legs from under nickel imports.

JP Morgan sees this shift from a balanced market in 2013 to a surplus, plus the weaker Chinese demand for refined nickel, as opening up the potential for a wider range of prices with higher levels of volatility. Current price risks are skewed to the downside, with prices needing to move lower in order to attract Chinese stainless producers.

The broker does see some upside potential, noting some uncertainty about ore availability heading into 2014, with the possibility of a global supply growth surprise likely to be supportive of improving stainless production rates, which is further helped along by hopes for European stainless steel re-stocking. Should it come about, the broker not only sees upside for nickel, but assumes such an outcome would be supportive of the entire base metal complex.
 

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