Aluminium mirrors global economic uncertainty

Aluminium is way below $2000/ton. Is it yet another indicator of the fragility of the world's economic recovery, particularly a recovery that depends on Chinese spending and investment?

On the London Metal Exchange （LME） during the first four or five years of this century, aluminium plodded along at around $1500/ton.

Then came the years of "irrational exuberance" that took LME spot aluminium to a peak of $3300 in mid-2008. By March last year, it was plumbing $1250/ton.

Certainly there has been something of a recovery with the scramble to looser monetary policies and lower interest rates more or less across the globe.

By mid-April this year the LME spot price was striving to break up to $2450/ton before diving to $1828 on June 7 and then recovering to somewhere shy of $2000 this past week before retreating yet again. The immediate future looks problematic with planned smelter closures in China being overtaken by new production coming on stream there and elsewhere. That's even despite some predictions of global demand rising by as much as 15% this year and, maybe, next.

Analysts reckon many Chinese smelters are losing money at prices around $2000/ton. At current power prices, it costs more than $2200, on average, to produce a ton of aluminium in China.

China is the world's largest producer of refined metal with an annual output in the region of 17million tons. Its smelters are suffering from rising electricity costs and their revenues are threatened by expectations that the yuan will strengthen slowly but steadily against the dollar, surcharges on heavy electricity users and an end to power subsidies.

All this chimes with the problems that BHP Billiton faces at its South African and Mozambican smelters.

At the recent CRU World Aluminium Conference in Oslo, Wang Feihong, an analyst with metals and mineral trading company China Minmetals, told delegates that China's aluminium market faces a surplus of 1.26million tons this year - domestic and imports.

He questioned whether the country could absorb that much surplus metal. No sooner had he finished speaking than 13 smelters in China's Henan province （which produces 20% of the country's total） announced the imminent closure of anything up to 700000 tons of capacity. Which is all very well, but there are also estimates that it will bring an extra three million tons of new capacity on stream this year.

To add perspective, the Henan closures are only slightly lower than the annual production of Rio Tinto. A number of new smelters are being built in oil-rich Middle East countries, and this is at a time when world warehouse stocks are high. LME warehouse stocks alone are currently greater than four million tons. Across in the US, the prospects of idled smelter capacity being brought back on stream any time soon are dim. But growing urbanisation in China, India and other Asian countries is expected to add significantly to demand over the next quarter of a century or so. But this year and next?

Phillip Strachan, the chief financial officer of Rio Tinto Alcan, is reported as reckoning that Chinese demand for alumina - the processed aluminium ore of bauxite - will rise by 22% this year to 37million tons and that its aluminium demand is likely to rise by as much as 20% year on year. And in Norway, Norsk Hydro hopes that Chinese imports of metal will improve.

But in Oslo, CRU Analysis's Marco Georgiou was cautious. He said demand may be rising, but new capacity would be more than sufficient to meet any increase in demand.

Global oversupply is set to persist this year and next, and in Oslo little prospect was seen of prices managing to break decisively above $2000/ton. And they will need to be a lot higher before a lot more, expensive capacity is to progress beyond the drawing boards.

Yet Oleg Deripaska, the CEO of Russian aluminium outfit Rusal, is confident. He believes the metal will recover to $2400/ton by the end of the year.