Aluminum Seen Extending Loss to $1,600 in 1st Half on Supply

Dec 27, 2013 8:42 am ET

(Updates with CRU comment in the sixth paragraph.)

Dec. 27 (Bloomberg) -- Aluminum may extend declines to as low as $1,600 a metric ton in the first half of 2014 as new rules from the London Metal Exchange make more metal available, said analyst Helen Lau of UOB Kay Hian Ltd.

Warehouses listed with the world’s largest metals bourse will have to release more of the commodity than they take in from April 1, the LME said last month after consumer complaints on waiting times and probes by U.S. regulators. Prices will be depressed regardless of whether the stockpiles go directly to users or shift to non-LME warehouses, Lau said.

Aluminum, used in everything from cars and airplanes to beer cans, dropped 14 percent this year after trading at the lowest in more than four years on Dec. 2. While LME-tracked inventories climbed to a record 5.5 million metric tons in July, consumers including brewer MillerCoors LLC complained of lengthy wait times for supplies that inflated costs.

“In the first half of next year we expect further pressure on prices because of the supply,” said Hong Kong-based Lau, who has monitored metals for five years. “After that, there will be even more uncertainty because some of the stockpiles will go to unreported warehouses, which will make it difficult to gauge.”

Stockpiles Estimates

Stockpiles held outside warehouses tracked by commodity exchanges total 5 million to 6 million tons now, down from about 6 million tons at the end of 2012, Andrew Shaw, head of base- metals research at Credit Suisse Group AG, said today by phone from Singapore. Those tracked by the LME stood at 5.47 million tons today, while Shanghai Futures Exchange deliverable inventories total 181,644 tons, the Chinese bourse said today.

Unreported inventories are closer to 4 million tons this year, with stockpiles outside China falling by 500,000 tons and those in China growing the same amount, Eoin Dinsmore, a consultant at CRU, said in a telephone interview today. Global reported inventories were little changed this year at about 8 million tons and will rise to 8.2 million tons in 2014 because of increased production in China, he said.

Stockpiles held in exchange warehouses, combined with private sheds of producers, traders and end-users, may total as much as 15 million tons, Wang Feihong, an analyst at China Minmetals Nonferrous Metals in Beijing, said today. Global aluminum stockpiles, including those monitored by exchanges, may be about 10.5 million to 11 million tons, United Co. Rusal, the world’s biggest producer, said this month.

Detroit, Vlissingen

The LME, where investors bought and sold contracts worth $14.5 trillion last year, oversees more than 700 warehouses around the world.

Withdrawing aluminum from stockpiles takes 16.17 months in Detroit, compared with June’s record of 19.3 months, and 14.8 months in Vlissingen, against an all-time high of 20.2 months in June, according to estimates by researcher Harbor Intelligence, which is based in Austin, Texas. The two cities have the longest wait times for withdrawals in the LME’s global network of warehouses.

“Inflow of metal into LME warehosues has been from off- warrant inventories rather than from producers,” CRU’s Dinsmore said from London today. “We are not going to see a net decrease until April, but even then it will be gradual. Unreported stocks in 2014 will be supported by outflows from Detroit and Vlissingen.”

Metal earmarked for withdrawal from LME-registered sheds totaled 2.36 million tons as of Dec. 24, accounting for 43 percent of total LME aluminum stockpiles at 5.47 million tons, exchange data show. Aluminum piled up at warehouses due to accumulated surpluses during 2008-2011, said Credit Suisse’s Shaw.

“Other than rises in interest rates that make alternative money-market investments more attractive, the only other aspect that could dampen cash-and-carry trade would be more forceful regulatory intervention,” Shaw said. “This seems unlikely to emerge in a hurry.”

--Editors: Claudia Carpenter, Nicholas Larkin