MI WEEK IN REVIEW: Bullish sentiment evaporating but bears may have to bide their time

The annual splurge of research and price forecasts that accompanies LME WEEK seemed to mark a general deterioration of bullish sentiment about aluminium’s prospects going into 2007. But waiting bears—and there are many lined up to try and capitalise on further price weakness—may have to bide their time as the prospect of a technical squeeze before the end of the year takes ever more concrete shape.

Bull Argument Undermined

Aluminium’s bull market credentials have been undermined by the collapse in the price of alumina, still-high Chinese production growth rates and expectations of a slowdown in global economic growth going into next year. Even the most bullish super-cycle proponents around the investment bank community seem a little under-whelmed by the light metal’s prospects over the medium term.

Projections about the production-consumption balance next year seem to be just either side of balanced—ranging from a 200,000t surplus to a 100,000t deficit.

Natexis Commodity Markets is looking for a deficit but even it conceded the size of the shortfall “is unlikely to cause extreme tightness or support sharply higher prices from current inflated levels.” It’s looking for an average price of around $2,500 per tonne next year, little changed from where we are right now.

Standard Bank is forecasting a slightly higher price of $2,550 “but a swift turnaround in this market’s fundamentals makes it one of the lesser favoured metals now.”

Mitsui Bussan predicts a slide to around $2,325 for average prices next year based on the seemingly inexorable rise in Chinese primary metal production.

With the analysts losing enthusiasm it was left to Alcoa chief executive Alain Belda to bang the bull drum on the conference call for the US producer’s Q3 results. His argument rests on the drop in global exchange stocks to 29 days’ of consumption—a historically low level—strong Chinese demand—running at around 20% a year, according to Alcoa—and a question-mark over the sustainability of much of China’s new alumina capacity.

"We can't figure out how to make an alumina refinery competitive unless it's on the ocean and close to a bauxite mine," Belda said, going on to note that “we're talking about refineries in the middle of China buying bauxite from Indonesia or from Brazil or from wherever.”

However, even Belda’s evaluation of the current fundamentals as “pretty solid” wasn’t exactly the stuff to get the bulls’ pulse racing.

Closures and Restarts

Some of China’s new mega alumina capacity may indeed have questionable economic underpinning but right now production is still surging and prices still sliding. Our friends at Platts peg the spot cif China price at just below $300 with local players looking for further price weakness in the weeks to come.

Buyers in the country are reported to be holding off in expectations they’ll be able to pick up the raw material at $250-260, which given the country’s dominant role in determining price may amount to a self-fulfilling prophesy.

There are growing expectations that the alumina market’s collapse is going to force producer cutbacks, particularly those at the top end of the cost curve.

A year ago and all the talk was of primary metal production cutbacks on the back of high power costs and, of course, what were then high and rising alumina costs.

But the last couple of weeks have seen two significant announcements—the restart of an idled line by Alcoa at its Intalco smelter on the US west coast and a confirmation from Germany’s Trimet that it is considering buying and restarting the Hamburg smelter, which was in theory closed for good this time last year.

Last week also brought news of a further extension of the shutdown deadline for some of Norwegian producer Hydro’s older-