Aluminium outlook dependent on China ,Europe

 

 

Assuming this occurs Deutsche expects risks relating to the region may be mitigated, while growth will be supported. Such a scenario would be important for metal demand in Europe. As Deutsche notes, such a scenario would also likely help boost sentiment in Asia where aluminium fabricators in particular have adopted a cautious stance given the difficulties in what is a key export market.

 

 

One catalyst that could improve aluminium market conditions in the view of Deutsche Bank is improving sentiment in Europe in both the current and upcoming quarters. The next few months should offer evidence of slightly stronger aluminium consumption in Europe. 

 

 

As well, any re-acceleration of Chinese growth, and as a consequence exports to Asia from Europe, would also be viewed favourably.

 

 

Capacity closures are another potential positive catalyst, as smelters continued to be pressured by tough market conditions. Any continuation of existing supply pressures could help tighten the aluminium market in the near-term, in Deutsche's view.

 

 

At present aluminium inventories in Europe are extremely elevated, but at the same time Deutsche notes actual physical availability of the metal is quite low and appears likely to decline. This is due to high metal financing incentives at present, which is seen as likely to continue to tie up metal in LME warehouses. 

 

 

The other factor in favour of an improvement in the aluminium market is Deutsche's view the metal is becoming an attractive target asset. This reflects both very accommodative monetary policy and inflexible LME warehousing rules.

 

 

Deutsche notes a recent spike in cancelled warrants for aluminium in LME warehouses, while normally a response to improved demand conditions, in this case is a reflection of the fact metal is not located where it needs to be to extract maximum returns from financing. This is due to aluminium being used as a financing asset.

 

 

How quickly this current trend comes undone is, in Deutsche's view, down to how long it takes for a possible future change in profit motive. This could be driven by higher opportunity costs for storing aluminium due to changes in interest rates for example, or a tightening in market conditions.

 

 

In assessing current aluminium market fundamentals, Deutsche expects average LME cash prices of US$2,325 per tonne thus year, US$2,300 per tonne in 2013 and US$2,350 per tonne in 2014.

 

 

Citi has also reviewed aluminium market fundamentals, concluding the perceived tightness is the result of a surge in cancelled aluminum warrants in LME warehouses over the past month. Cancellations are now at 1.6 million tonnes, which is 31% of total LME aluminium inventory.

 

 

In Citi's view the cancellations are not being driven by stronger demand, but rather are an attempt to push physical market premiums higher as warehouses shuffle their stocks. Adding to the sense of market tightness has been further capacity closures by Alcoa and Rio Tinto , among others.

 

 

Taking a longer-term view of the market, Citi suggests the key for aluminium prices remains continued growth in Chinese smelting capacity. Total Chinese aluminium production is forecast to grow by at least 12% this year, an increase that is unlikely to see China short of the metal.

 

 

As a result, Citi's view is for limited aluminium price upside in the medium-term. Forecasts reflect this, as Citi expects average LME prices of US$2,500 per tonne thus year and US$2,275 per tonne in 2013. 

 

 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided.

 

 

Our archive tells no lies. FNArena warned its readers well before the price of crude oil peaked in 2008 the speculator bubble would deflate with devastating consequences for those holding oil company shares. In August we warned the most severe correction in modern history was forthcoming for natural resources. In 2007 we warned the problem with US subprime mortgages would prove much bigger than experts and media were anticipating (among other things).

 

 

FNArena is showing the true value of truly independent financial analysis and reporting. Our daily news reports can be trialed at no cost and with no obligations at www.fnarena.com. Simply sign up and see it for yourself.

 

 

Subscribers and trialists should read our terms and conditions, available on the website.

 

 

All material published by FNArena is the copyright of the publisher, unless otherwise stated. Reproduction in whole or in part is not permitted without written permission of the publisher.