Commodities | Nov 22 2012
– Aluminium market could be flooded in 2014
– ANZ sees risk material held in financing deals hits the market in a short period
– Bank expects prices would fall accordingly
By Chris Shaw
By the middle of 2014 as much as 70% of on-warrant and off-market aluminium stocks could come to the market over a span of three to six months, adding as much as eight million tonnes of metal to global supply.
ANZ Banking Group suggests rising interest rates will be the trigger, as this would make contango financing unprofitable. Assuming this metal hits the market, there would be a significant increase to the current forecast surplus for aluminium in 2014 of 1.2 million tonnes.
Such an increase in the market's surplus would push down prices, ANZ suggesting the aluminium price could quickly decline by as much as 20%. The bank has factored some of this into its forecasts, as at the end of 2014 ANZ expects an aluminium price of US$2,182 per tonne, compared to a forecast of US$2,315 per tonne for the end of the first quarter of that year.
These are end quarter numbers, so ANZ cautions prices could spike below US$2,000 per tonne if the on-warrant and off-market trades unwind. While the current spot price for aluminium is around US$1,950 per tonne such a price fall doesn't appear too drastic, but this ignores the fact smelters currently earn an additional physical premium of US$150-$250 per tonne given limited availability of material.
Even with this premium, ANZ suggests around one-third of global smelters are operating at a loss at present.
Assuming large amounts of material come to market, ANZ expects price pressure as motivated sellers discount material. This will impact most heavily on unhedged producers, who would face the combination of lower prices and no premium for scarcity. The result would be the need to choose between loss-making output and the equally costly alternative of shutting down.
At present ANZ estimates companies with better credit ratings pay around 1% in financing charges, while lower rated players could pay as much as 2%. The latter implies annual interest charges of around US$41 per tonne at an aluminium price of US$2,050 per tonne.
Nominal warehouse rents have trended higher in recent years as more metal has gone into storage, ANZ estimating LME storage at presents costs around US$44-$55 per tonne per year. These costs suggest a run up in market interest rates of less than 100 basis points would be enough to make such trades uneconomic if the cash to 12-month spread was to remain steady at US$100 per tonne.
Leading up to any such liquidation in the market, ANZ expects stock would migrate from private hands to LME warehouses as those financing metal positions will want stock to be as liquid as possible.
Any fall in prices from large liquidations in the aluminium market would bring consumers and value investors in, so ANZ expects consumers would shift to hand-to-mouth type operations in the lead-up to any liquidation event.
One other impact in ANZ's view is in coming years lenders may be less willing to offer low-rate funds over the longer-term if there is scope for interest rates to increase. Such a change would concentrate large amounts of expiring material into a narrower time frame, which would add to market disruptions.
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