Worldal reported that despite strong expected demand growth this year, aluminum prices are likely to see a correction to USD 2,200 per tonne in London by the end of the year as interest rates rise making financing deals less attractive.
Mr William Adams senior analyst of base metals said while speaking at the 2011 ISRI Convention and Exposition in Los Angeles that much of the aluminum stored in London Metal Exchange warehouses was being held on financing deals.
Mr Adams said that those financing deals became more main stream when commodity prices began to rebound in late 2009 as interest rates fell and banks saw more liquidity. Weakness in the US dollar and concerns about the value of paper assets reinforced the notion of holding base metals to hedge against price volatility. But those deals are now susceptible.
He said that with inflation on the rise, interest rates are likely to rise before too long and this might make it difficult for new financing deals or to roll forward existing financing deals. Therefore, there is a risk that the supply situation could become a bigger more serious issue. Aluminum supply grew 49% between 2000 and 2010. As a result the cumulative market surplus between 2007 and 2010 grew by conservative estimates to 3.7 million tonnes.
According to estimates by the World Bureau of Metal Statistics, production capacity is still rising as is production itself. So we expect another year of supply surplus this year. Last year, the global aluminum market was estimated to be in surplus by about 577,000 tonnes. This year aluminum production is expected to grow 8%. The excess production has resulted in exchange stocks totaling nearly 7.4 million tonnes with another 3 million to 4 million tonnes thought to be held in private warehouses.
Mr Adams said that current aluminum stocks are sufficient to satisfy global demand for 38 days compared with just 6 days for copper. Financing deals have absorbed much of the excess production and have therefore helped keep aluminum prices high despite the market surplus and rising stocks. Without financing deals, metals prices would undoubtedly be lower.
He said that the absorption of excess aluminum into storage through financing deals meant that producers could continue to produce knowing that much of their production would never reach the market and push down prices. In many ways, what we are seeing is an aberration, a consequence of circumstances. But the fact is that financing deals exist and while they do, a surplus is likely to hang over the market. But rising interest rates, and the end of quantitative easing programs by central banks are likely to decrease the attractiveness of financing deals.
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