Commodities | Oct 17 2008
By Chris Shaw
Along with its base metal partners, aluminium prices have slid in recent weeks, Standard Chartered putting the reasons down as investor de-leveraging, concerns about underlying demand and a stronger US dollar.
The price of the metal has dropped more than 30% from its record highs in July as the markets continues to trade in very volatile fashion but eventually things will settle down and when this occurs Standard Chartered expects the market will focus on underlying demand fundamentals.
The problem here is the outlook is not so good, the group pointing out demand in China, the world’s largest producer, is falling thanks to tighter credit policy and weaker end product demand from key industries such as construction and transport.
Changes in taxes are also impacting, leading the group to suggest demand by fabricators for aluminium for export will also fall in coming months. At the same time production levels remain high, the result being the Chinese market is moving into a significant surplus.
As producers deal with this surplus domestic prices are being cut, to the extent prices in the Chinese market are now factoring in significant discounts compared to prices on the London Metals Exchange (LME). At present Standard Chartered notes the discount is in the order of US$500 per tonne, which is material given prices for the September quarter were around US$2,800 per tonne.
This weak domestic demand in China will continue and has seen the group cut its expectations for Chinese primary aluminium consumption growth to 14% year-on-year in 2008, down from 23% perviously and well below the 38% growth recorded in 2007.
This lower demand is expected to continue to weigh on LME prices and Standard Chartered has adjusted its numbers accordingly, its forecasts now calling for a December quarter average price of US$2,300 per tonne and a 2008 average of US$2,727 per tonne. Into 2009 prices should ease further with the group forecasting a March quarter average price of US$2,200 per tonne before a modest recovery to an average of US$2,300 per tonne in the June quarter.