Commodities | May 31 2006
By Greg Peel
(Note: it takes bauxite, which is dug out of the ground, to make alumina, which is then smelted down to make aluminium)
Recent data from China Customs show that at 752kt, April imports of bauxite were up a staggering 501% compared to April last year. On a year-to-date basis, bauxite imports are up 279% from the corresponding ytd last year at 1.9Mt.
The production of alumina in April was up 51% on the previous April and, unsurprisingly, direct imports of alumina to China fell 5.8%. Overall consumption of alumina was up only 15% for January-April. The price of alumina has begun to fall.
What is it about aluminium? JP Morgan notes that aluminium is thrown into the mix with the other metals, of which copper tends to be the benchmark. But copper has unique characteristics of present situation and future outlook, and to equate aluminium with copper, says JP Morgan, is just plain wrong.
Aluminium runs at inventory levels that are far more comfortable than copper, notes Morgans. China exports, rather than imports. There is enough bauxite to allow for a 9.5% increase in alumina supply in 2006 and a 7.5% increase in 2007.
Another strange phenomenon is that the bauxite industry does not suffer, as copper does, from a lack of trucks, tyres and engineers. Why this is the case is a mystery to Morgans as well. But either way the copper "theme" of a three year lag in production response to current high margins is not a problem the bauxite industry faces.
Copper has only 1.8 weeks of inventory, and there are still billions of dollars of fund investment being thrown at it. In this scenario it is no surprise that Morgans suggests "any price outcome is possible". It is also no stretch to see why the copper price has shrugged off its correction without undue devastation. Aluminium, on the other hand, has always underperformed copper, as well it might.
Morgans believes that as a "lower risk" metal, that is one that behaves a bit more normally than the others, it is also less of a risk in a bear market. However, we are still in a bull market, but with pressure building it is possible aluminium will "break ranks" and head south.
This shouldn’t, in theory, affect copper or the other metals, but Morgans suggests that if one goes then the sheer weight of speculative money will be spooked and the whole complex could come tumbling down.
This is not about to happen immediately. Standing in the way of any significant fall in the aluminium price at this time is one factor that all metals have had to endure, aluminium included, and that is industrial dispute.
The mighty AWAC joint venture between Alcoa (60%) and Alumina Ltd (AWC) (40%) employees 9,000 Americans across 15 operations. Today the current labour agreement expires, and the employees are ready to do battle.
As has been the experience between Grupo Mexico and its copper mine employees, expectations are for no smooth rollover of agreement, and many issues, right down to health cover, are at stake.
Credit Suisse reports that the impact of a work stoppage is potentially 3.4% of global alumina supply and 3.5% of global aluminium supply.
The specific effect on Alumina (the company) is mixed, as a supply disruption will clearly push up prices but there will be a dent in earnings from lost production, CS notes.
A significant increase in capex is expected for the AWAC project over the next two years as it embarks upon the single biggest growth initiative in a decade, CS reports. The forecast cash flow yield for Alumina over the next three years is expected to be comparable to those of the mighty BHP Billiton (BHP) and Rio Tinto (RIO), and may even exceed by 2008.
Credit Suisse rates Alumina an Outperform with a target price of $9.98. In fact of the ten brokers/advisors in the FN Arena database, only two – GSJB Were and Aspect Huntley – presently rate Alumina as Hold, with all the rest being Buy. The average target price is $8.50 compared to yesterday’s close of $6.93.
Both Merrill Lynch (having issued several warnings over the past few weeks and again this morning) and JP Morgan are included in the Buy school, which tends to belie the reports published today and highlighted in this article. The assumption one would have to draw is that Alumina (the company) may yet be ready for reassessment over a longer term basis, as supply disruption dominates the short term.