METALS INSIDER - Steel producers show aluminium the way

LONDON, May 21 (Reuters) - Steel and aluminium are two metals with a lot in common at the moment. Both are exposed to the full force of manufacturing recession via their use in the automotive and construction sectors, which remain the twin points of maximum demand weakness outside of China. Both metals have structural overcapacity, although the full extent of that in aluminium has only been laid bare over the course of the last few months. In both cases much of that structural overcapacity is located in China. Both the steel and aluminium production sectors in the country are notoriously fragmented and both have been subject to repeated, largely unsuccessful clampdowns on "blind" investment by central authorities. However, two sets of global production figures released on Wednesday reveal a very different supply-side response in the two metals. STEEL PRODUCTION SLASHED Global crude steel production in April was 89.5 million tonnes, down by 23.6 percent from April 2008, according to the latest figures from the World Steel Association.[ID:nLK384681] Cumulative production over the first four months of this year was 354 million tonnes, down by 22.7 percent on the same four-month period of 2008. Not entirely surprisingly, the most muted supply-side response to evaporated demand has come in China, where production was by and large flat year-on-year in the Jan-Apr 2009 period. However, producers in the developed world have more than compensated. Production fell by 44.2 percent in the European Union and by an even more impressive 48.5 percent in the United States. Leading the way has been ArcelorMittal, the world's largest steel-maker. It has almost halved production so far in 2009 and it is still chopping away at surplus capacity. Earlier this month the company announced its intention to idle more production at its Indiana Harbour facility in East Chicago [ID:nN13376718] and this week it said it is considering drastic action at its loss-making facilities in Kazakhstan. [ID:nLJ567082] ALUMINIUM PRODUCTION TEMPERED Compare and contrast what is happening in the steel sector with events in the aluminium production sector. The latest International Aluminium Institute (IAI) figures show that global production was down by a relatively modest 10.1 percent in the first four months of this year. As with steel, China is the major rogue factor in global production discipline. China was the first to respond to the Q4 2008 collapse in prices and a 15.9 percent production slide in the first four months of 2009 is still the largest national/regional cutback in the light metal. However, production in the country actually rose in April and most local commentators expect it to continue rising in May as new and restarted capacity fires up. [ID:nLE143779] The response in the rest of the world remains highly muted. Global output of aluminium fell by "only" 7.2 percent in the Jan-Apr 2009 period. Among the world's biggest producers Alcoa has led the way with production cuts of around 20 percent across its smelter portfolio. UC RUSAL is planning to reduce its group output by around 11 percent by the end of this year. [ID:nLL637986]. Rio Tinto Alcan is aiming for a very similar sort of figure. [ID:nSYD43253] Aluminium producers will argue that closing smelter capacity in an orderly way is a lot harder than shutting steel blast furnaces. But many months into this manufacturing crisis the response still seems to be a case of too little, too late. STOCKS RESPONSE That much is clear from the continued surge in LME warehouse stocks of aluminium. There have been repeated optimistic suggestions that the rate of build was starting to slow. They have repeatedly been proved wrong. In the first two days of this week alone, LME-registered stocks have risen by over 200,000 tonnes. <LME/STX1> Some of that, particularly the 53,775 tonnes warranted at Detroit on Monday, falls into the "one-off" category. Much of the rest doesn't. Tuesday's 83,250-tonne inflow, for example, was split across thirteen locations in three continents. Moreover, the LME figure doesn't include the multiple stockpiling initiatives underway in China by the central stockpile manager (the State Reserve Bureau), regional governments and the power sector. The cumulative inventory now held by such players is certainly no less than 1 million tonnes and quite possibly a lot more. Unfortunately, there is no equivalent overview of global steel stocks but some insight comes from the U.S. service centre inventory data released by the Metals Service Center Institute (MSCI). Steel product inventories in the United States, where metals demand has been weakest for longest, fell by 30.9 percent year-on-year to 7.1 million tons at the end of April. At current shipping rates that's equivalent to an ultra-low 2.9 months' supply. That in turn has raised expectations that a major restocking exercise is fast approaching. [ID:nN19427242] No such optimism pervades the aluminium market. Although U.S. service centre stocks are also low at 3.3 months' supply, the figure must be seen in the context of huge and still-accumulating stocks of the light metal both in the country and just about everywhere else. And global aluminium stocks are going to continue rising until Western producers learn a lesson from their steel counterparts. Don't rely on the Chinese to maintain supply-side discipline. They won't. ArcelorMittal has got it right and as a result the steel sector looks a lot better positioned for fast recovery than aluminium.