METALS INSIDER:Aluminium stockpiling: self-defence or self-harm?

LONDON, June 23 (Reuters) - Extraordinary times call for extraordinary measures. When the price of aluminium plummeted down the production cost curve in the closing days of 2008, the Chinese government stepped in to protect its producers by buying up surplus metal at above-market prices. The central stockpile manager, the State Reserve Bureau, bought 590,000 tonnes. State power companies, which have a vested interest in keeping some of their biggest consumers afloat, also stepped up to the mark with similar-sized purchases of aluminium. Regional Chinese governments, desperate to avoid smelter closures and the accompanying loss of jobs and drop in tax receipts, have devised their own stockpile plans, largely involving the provision of discounted credit facilities to allow individual smelters to finance unsold stocks. Now non-Chinese producers are doing the same. The exact details are still shadowy but UC Rusal, the world's largest producer with its roots in Russia, has sold a sizeable tonnage of unsold production to its 9.7-percent shareholder Glencore. [ID:nLF699919] The metal will be stored away from prying eyes and analysts' market calculations for several years. Here too the motivation appears to be basic survival. UC Rusal is currently locked in negotiations with 70 banks over the restructuring of $7.3 billion of loans. [ID:nLH533519] This is not a good time to dump such a large tonnage of aluminium on the LME, further inflating already swollen visible inventory and further depressing already bombed-out prices. Since UC Rusal is a pillar of Russia's resources sector and its debt restructuring is a litmus test of the country's ability to manage its $453 billion of foreign debt, the fate of the company is of massive national importance. The problem is that short-term gain for both Chinese smelters and for UC Rusal may be at the price of long-term pain for the entire global aluminium smelter sector. CHINA'S PROBLEM China is starting to live with the consequences of that early-year intervention in the local market. By helping to boost local prices relative to international prices the Chinese authorities flung open the arbitrage window. A flood of aluminium is moving through that window, as is shown in the following graphic: