Rusal touts merits of Aluminium ETF

The surplus continues, even though aluminium has performed better than most of the other base metals, apart from tin and lead, since the start of April to early May, losing 11% of its value to sub $2,100/t levels. Prices have since rebounded as macroeconomic fears have eased, but our overall estimate of the aluminium market in 2010 and 2011 makes for grim reading.

Aluminium is caught between two dynamics. Term financing deals are keeping back a lot of LME registered metal from the markets, and there are large volumes held in off-market stocks. This is likely to continue in the short-term due to the near zero interest rate environment. Rusal meanwhile is touting the merits of aluminium ETF, asserting it has little spare supply to sell to the markets in this quarter, and this is partly the reason for current tightness.

This is largely due to Rusal’s offtake deal with Glencore, and neatly symbolises a market that has plenty of metal – but metal that is largely unavailable to physical consumers. What supply or stocks there are is becoming increasingly squeezed by the recovery in demand, as indicated by rising premiums in the EU and US and the return to profit for many smelters in Q1 2010.

We maintain our surplus estimate of 1.5 Mt in 2010, but should this informal withholding of aluminium from the market hold throughout this year then we see the surplus declining to below1 Mt. However this merely pushes the fundamental weakness in the aluminium market into 2011, whereby the huge volumes of stock might flood back should interest rates rise?

Chinese aluminium production hit an annualized 16.6 Mt in April, from 16.1 Mt in March, while production capacity by year-end should top 22 Mt in our estimate. Although we expect rising power tariffs could constrain output later this year, we expect its demand to be almost wholly satisfied domestically. China will therefore not be a prolific importer of aluminium and will offer little relief in bringing down stock levels. Its April import figures for unwrought aluminium and aluminium products was 93,341t, down 79% year-on-year.

Short term outlook on Aluminium

There is little to be bullish about. Falling LME stocks have been counterbalanced by rising SHFE stocks and higher premiums are misleading, implying insufficient supply but one that is essentially an artificial construct. Demand growth may turn out later this year to outpace supply growth, as many OECD smelters are yet to return to full capacity. We therefore see downside price risk in H2 as restocking fades. Short-term LME three-month price: $2,000/t-$2,300/t.