METAL
If there is a common theme emerging from the recent strong gains in commodity prices, it’s that the extent of the rally isn't justified by fundamentals and is therefore largely speculative.
Assuming this market consensus is correct, it’s logical to assume that at some point the heat will go out of the market and prices will stabilise or retreat.
It would also be logical to assume that the gains in some commodities have been more justifiable than those for others, given the differences in supply and demand dynamics.
The question then becomes one of which commodities will hold more of their gains and which will be most vulnerable to a sharper pullback.
Iron ore and steel may be among the commodities best positioned to retain some of their gains, while aluminium looks to be one of the more at risk.
The main reason for this is the changing dynamics of the Chinese economy and the efforts by various authorities in the world’s biggest commodity consumer to remove some of the trading froth that has built up recently.
Aluminium on the Shanghai Futures Exchange has jumped about 17.6 percent since the start of the year to last week's close of 12,840 yuan ($1,981) a tonne, near its highest in 10 months.
London benchmark aluminium hasn’t rallied quite as hard, but is still about 9 percent higher from the end of last year to 1,648 a tonne.
The problem for aluminium is that, unlike steel and iron ore, there hasn't really been a positive shift in the supply-demand balance, rather the opposite is more likely to be the case.
In fact, it appears that aluminium output has been increasing both inside and outside of China recently.
The word "appear" is used deliberately given considerable doubt about the accuracy of the figures from China, which have shown month-to-month variations that seem to bear little relationship to what is actually possible.
China's output in March was 2.62 million tonnes, or 84,500 tonnes per day, up from 71,400 tonnes per day in February, according to the International Aluminium Institute (IAI), which gets the data from the China Nonferrous Metals Industry Association.
"Are you kidding?" was how Beijing-based consultants AZ China put it in an April 22 note. "They would have us believe that daily metal production dropped by 11 percent in February but grew by 19 percent in March?
Assuming daily production per pot of say 2.5 tonnes, it means that 5,400 pots suddenly sparked up on March 1. That´s something like 10 smelters running at full speed on March 1, after being idle on Feb. 29," AZ China said.
If there is any value in the figures, it’s that they imply that aluminium production is once again rising in China, something that would make sense given the higher SHFE prices and the history of smelters restarting in response to gains.
The IAI said aluminium production outside China was 2.146 million tonnes in March, up from 2.027 million in February, leaving the daily rate slightly lower at 69,200 tonnes from 69,900 the month before.
This means that rising Chinese output isn’t really being offset by lower production elsewhere, meaning the metal has to find buyers or go into inventories.
Will additional aluminium find customers inside China? It’s here where the outlook is less rosy than it may be for steel. Part of the reason for the commodity rally is the view that China is ramping up construction and infrastructure spending in an attempt to generate economic momentum.
If this is the case, it’s certainly positive for steel, and the commodities that go into its manufacture, such as iron ore, coking coal and minor metals such as zinc and manganese.
But while aluminium is used in construction, it relies much more heavily on manufacturing of vehicles and equipment and retail applications such as packaging.
These aren’t necessarily the sectors that will benefit the most from any increased Chinese stimulus spending, meaning aluminium probably lacks as strong a demand story as iron ore and steel.
Dalian Commodity Exchange iron ore contracts have surged almost 60 percent so far this year, while SHFE steel rebar futures have jumped 50 percent, meaning they have outperformed aluminium by quite some margin.
But there is evidence of rising steel demand and some supply discipline among major iron ore producers, suggesting that not all the rally has been a speculative bubble.
It´s hard to say the same about aluminium, which appears to have rallied despite a worsening supply-demand balance.
The writers is a columnist for Reuters
