Aluminium stocks mountain on LME is sky high

LME aluminium stocks showed the first decline in more than ten months in late March, suggesting that perhaps production cuts are beginning to filter through, although the decline is most probably the result of Chinese restocking and the resultant arbitrage trade between the higher Shanghai price over the LME price, in our view. Stocks have a long way to fall, having grown by 0.24 Mt in March from an increase of 0.42 Mt in February, to reach 3.51 Mt by 6th April. Meanwhile, the three-month price has strengthened by $150/t to more than $1,450/t over March and into early April. This disconnect between high LME stocks and price is largely due to short covering against wrong-way bets made last year that anticipated the metal's price would deteriorate to levels far worse than it actually dipped to. Had China's State Reserves Bureau not bought 590,000t of aluminium over the past few months, LME stocks would be higher still and the short sellers probably vindicated. However, this has not happened and puts the light metal into troubled territory. Despite 6 Mt of aluminium production having been cut globally so far in 2009, more is needed and news that 700,000t of idled Chinese capacity will soon be brought back online does not help. Chinese support of their domestic smelters puts the aluminium market in serious risk of being saddled with a huge surplus overhang, which will dampen the price for years to come. Global aluminium demand is dire, with consumption in the US and Europe likely to contract by double digits in 2009, and Chinese consumption growth markedly down from 2008 levels. The prospects for aluminium's key end-use automobile sector remain extremely poor, with US new car sales down by more than 36%. Aluminium Outlook Aluminium's stocks mountain is sky high and demand is the worst for decades. Despite its voracious appetite, China will not make up for the sharp contraction in demand in the West, and this will see the aluminium price deteriorate sharply once the short covering exercise is over. The fact that 700,000t of idled Chinese capacity is due back online puts further downside risk on the price. Short-term LME three-month price: $1,250/t- $1,600/t. Some Aluminium News Apr 7th: Rio Tinto cut bauxite production at its Weipa operation in northeastern Australia to 15 Mt in 2009 from 19.4 Mt in 2008 due to falling demand. Rio's expansion of its Yarwun alumina refinery at Gladstone in Queensland will also be delayed to the second half of 2012. Apr 1st: Production from Bosnia's sole alumina plant Birac will fall almost two thirds to 120,000t of alumina in 2009, because of low demand and prices. Mar 30th: Chinese aluminium smelters are due to restart 700,000t of idled capacity that was shut in Q4 2008 due to the high Shanghai price. Courtesy: Fortis Metals Monthly