MI WEEK IN REVIEW: Rio Tinto joins the long-term bulls

MI WEEK IN REVIEW: Rio Tinto joins the long-term bulls One of the characteristics of the aluminium market for some time now has been the mismatch between short-term bearish sentiment and strident long-term bullish sentiment. While LME 3-month metal struggles against a bear horde of technical funds, it has been outpaced by price gains further along the forward curve. Last week was no exception, 3-month metal failing to capitalise on its move up through the $2,800 level the previous week. It got as far as next resistance at $2,830-2,840 but failed to shake off the ubiquitous producer sellers and shorter-term players looking to play the light metal from the short side. It ended the week back down at $2,792, a week-to-week loss of $20. It didn’t help that copper stalled at the big $8,000 psychological level. Nor did the latest bout of risk aversion rippling out of the troubled US sub-prime mortgage sector. LME stocks continued rising, the headline figure hitting a fresh 3-year high on Thursday. Inflow at Asian locations has accelerated—no doubt a displacement effect of China’s booming exports of aluminium product—while there is little in the cancellation department to suggest anything more than a mild short-term acceleration in draw activity. On its Q2 financials conference call Alcoa said it is expecting the aluminium market to record a 300,000t surplus this year. That’s not large—just 3 days’ worth of global consumption by Alcoa’s assessment—but not a prognosis likely to fire an unenthusiastic market. More interesting was Alcoa’s revision of its expected alumina surplus to a range of balanced to 1 million tonnes from a previous 1-2 million tonne range. Delays to brownfield expansion projects and higher-than-expected demand from a still-roaring Chinese smelter sector were the two reasons cited for the change of projection. Happy Alcan Alcoa was in the headlines for other reasons last week, though. It decided to drop its hostile bid for Canadian peer Alcan after being outgunned by Rio Tinto’s 30% premium bid. The “white knight” was greeted with open arms by the Canadians. Rio’s chief executive Tom Albanese, who has only been in the job a couple of months and, according to one biog we’ve read, likes nothing more than chugging along the UK’s canal system during his time off, seems set to steer Rio Tinto into the top producer slot for aluminium. The marriage with Alcan will be one of upstream assets with the packaging division to be divested. The eye-watering $38 billion take-over bid, however, is a massive vote of confidence in the market, from which the long-term bulls will take heart. Rio has articulated the longer-for-stronger super-cycle view of commodities on the back of industrialisation in China and other developing countries. However, it has also said that current Chinese aluminium production growth is unsustainable given the fact that much of its capacity is in the top quartile of the cost curve. With the cost curve continuing to rise on the back of rising power prices, the market will favour those producers sitting in the bottom quartile—something it sees both in itself and in Alcan. This is very much in line with the long-term aluminium bull thinking. China’s booming production and high exports are the main reason for the short-term negativity in the light metal. However, a combination of market economics and government intervention in a sector it has long targeted as guilty of “blind” investment will constrain production growth and turn the country back to net importer of metal. Not tomorrow or the day after. But some time in the medium term. Hapless Alcoa For its part Alcoa said it will go back to an organic growth programme. “At this price level, we have more attractive options for delivering extra value to shareholders,” said chief executive Alain Belda. The question is whether it will be allowed to do so. The company will be keeping its eyes on another new chief executive at BHP Billiton, where Marius Kloppers takes over from Chip Goodyear on Oct 1. BHP Billiton is one of the names in the frame—the other is Brazil’s CVRD—to capitalize on Alcoa’s failed bid with a swoop on the US company. Nothing is certain and dismantling the upstream and downstream parts of Alcoa is likely a more difficult exercise than at Alcan. For this reason both rumoured predators are reported to be working with venture capital funds, who have been active buyers of downstream aluminium assets for some time. One thing is for sure though. Rio Tinto has just raised the bar for purchasing upstream aluminium assets. By doing so, it has placed itself firmly in the long-term bull camp.