MI WEEK IN REVIEW: Aluminium sucked higher but makes heavy weather of it

LME aluminium got sucked higher last week by the summer buying spree that washed over the whole complex late in the week. “Summer madness” was how some LME locals were this morning describing the late-week surge, in reference to the “usual” seasonal pattern of slower demand translating into metal price weakness. Or perhaps they were referring to the very un-summer-like rains and flooding that had descended in biblical proportions on the UK. The analogy is an apt one for aluminium because more than most, it seems still to find the upside extremely heavy going. Future Tense LME 3-month metal spent the first part of last week dawdling in a $2,780-2,820/t range in slow conditions. The only game in town for the short-term summer punters seemed to be soar-away lead. A flicker of mild excitement came from a further flurry of buying of far-dated aluminium and complementary forward spread lending, particularly Dec 08 to Dec 11. London locals were quick to seize on a newswire report about Rio Tinto’s intention to unwind Alcan’s forward hedge programme as justification for the move. Rio Tinto has a policy of not hedging its metals production and company officials were quoted as saying they intended to eliminate Alcan’s programme—around 10% of group production this year and next, or just over 300,000t—once Rio takes over the Canadian producer. However, we’re a bit sceptical of the link made last week between forward price strength and this story. Firstly, the newswire item that got locals so enthused was actually a repeat of an over-looked story from the previous week. Secondly, it may be a bit premature for Rio Tinto to start unwinding Alcan’s hedges before the deal has even been concluded. Forward price strength is nothing new in the light metal and has been a feature for many months now, reflecting both the stronger-for-long super-cycle view of the industrial metals and, in aluminium’s specific instance, a consensus expectation that China over time will stop being a disruptive bear influence on the market as it shifts from net exporter to net importer of aluminium. Right now, China continues to deluge the surrounding region with exports. These are no longer in the form of primary metal but rather in the form of “product” as local players capitalise on the tax differentials in the country’s export tax code. Exports of such “product”—and we use the word cautiously—surged to a fresh monthly record of 220,420t in June, while cumulative exports of 1,021,732t in Jan-Jun 07 were almost double last year’s equivalent 526,600t. That June surge was expected since the authorities have removed tax rebates on “product” effective the start of this month. How effective that will be in stemming the flood remains to be seen, though, and it’s worth noting that Beijing may also be a little sceptical since it moved again last week to tighten the export tax code via the imposition of an outright export tax of 15% on bar and rod, effective the start of next month. It’s definitely a step in the right direction but one, we suspect, that will have to be followed by a further closing of the loop-holes if Beijing really wants to rein in the country’s still-explosive aluminium production growth. The latest figures from the China Non-Ferrous Metals Industry Association showed primary metal production growth tentatively topping out in June but it is doing so at an extremely high level—still over 33% year-on-year. Production growth in the rest of the world, by contrast, was just 2.9% over the first half of this year, according to figures from the International Aluminium Industry. Those high Chinese exports seem to be displacing metal consumption elsewhere in the region. It is surely no coincidence that LME stock levels hit a fresh 2007 high on July 12 thanks to inflow that was almost exclusively concentrated on warehouse locations in the Asian region. Present Imperfect High LME inventories are fully reflected in the market’s nearby structure. Lending across the front months remains a steady feature—“lend in May and go away” was one local’s pithy description—with the benchmark cash-to-3-months period ending last week valued at $54.75 contango, out from an already yawning $51.75 contango the previous Friday. Ample short-term supply remains the main reason for aluminium’s laboured upside progress. It was stirred into life by the cross-metals rally on Thursday as fund flows reacted to the combination of Fed chairman Ben Bernanke’s assessment that housing would remain a drag on US growth and the super-strong Chinese Q2 GDP figures (up 11.9%) reported Thursday morning. It got more than a helping hand from copper, which vaulted the key $8,000 hurdle, and it was also aided by the fact that there is still a big systematic fund short position structured across the front months. Covering by the CTAs—the collective short was trimmed from 36% to 24% of historic capacity last week, according to our sources—was the driver for aluminium to clear its own $2,850 hurdle. The Friday close at $2,856 was a week-to-week gain of $64 and should have been a strong foundation for more technical strength this morning. As of time of writing, though, the light metal was back down at $2,835, which is symptomatic of the uphill battle it faces, particularly with producer selling likely waiting in the wings at the higher numbers. A decidedly soggy performance. Much like most of the UK at the moment.