Commodities | Jul 09 2008
By Chris Shaw
For some time Danske Bank has been bullish on aluminium given the metal’s dependency on energy prices and the likelihood China will switch to being a net importer at sometime in 2009. As well, unlike a number of other commodities, the bank sees limited downside, noting the metal currently trades close to its production price.
Others in the market also appear to be turning more bullish as the aluminium price has enjoyed strong gains in recent sessions, largely on the back of an announcement part of Chinese production will be lost following the closure of some smelters on the back of power shortages.
It is these power issues that support the bank’s view growth in Chinese supply will be limited going forward, as a lack of a reliable power supply increases the risk additional smelters are shut down for short or even longer periods. This in turn would limit production as on the bank’s analysis a number of producers in the Chinese market would not be profitable if forced to buy energy at current world market prices.
While the length of any power shortages cannot be predicted the bank takes the view the cuts in production already announced and likely to be announced in coming weeks and months will open the eyes of global investors as it will show forecast Chinese output is far from guaranteed, especially during summer when electricity consumption is at its highest.
This in turn will lead to the market bringing forward its assumptions of when China will switch to being a net importer of aluminium, meaning price risk for the metal is firmly skewed to the upside at present. This is especially the case when the usual array of potential supply side issues are added to the mix.
While China is the major driver of aluminium prices at present the bank also sees scope for issues in the European market to add to the upside risk given expectations for decisions to be announced in coming weeks as to the structure of carbon emission trading schemes.
If the aluminium industry is included in any scheme it will add significantly to production costs, further pressuring industry margins in the bank’s view as electricity prices are already being inflated by the current emission schemes in place and the aluminium production process requires substantial amounts of electricity.
Given such an outlook Danske Bank continues to recommend being long the metal even allowing for the fact the market is currently in contango, which means future prices are higher relative to spot prices. In the bank’s view anything below US$3,000 per tonne is cheap for the metal at present with Danske analysts forecasting an average aluminium price of US$3,300 per tonne in the second half of the year and US$3,400 per tonne in 2009.