Market and product

NEW YORK (Commodity Online): Aluminium prices have suffered disproportionately over the past month, falling by close to 10% since the beginning of March. A modest increase in LME open interest levels since mid-March supports the view that CTA shorting has been a key factor behind the downward move.

From a fundamental perspective, there has not been a justification for the degree of price move. The market balance has moderately tightened, and the risk from closures at current price levels (close to 2.5Mty capacity ex- China is unprofitable) should limit further downside.

The IAI production figures for February offered sharply divergent regional trends. Following the announcement of several cutbacks to capacity in the US and Europe at the turn of the year, the IAI data confirmed this with global output ex- China falling to 68.9Kt, the lowest level since December 2010. China, however, saw the opposite trend, with the CNIA data showing output in February at 53.4Ktd, up by 19% y/y and a record level. Set against relatively sluggish demand, the rampup of new capacity in lower-cost power provinces evidently pushed the domestic market into clear surplus in Q1. However, positive price signals, reports of sequential improvements in demand and a stabilisation in stock levels in early April point to tighter conditions emerging in Q2 in China.

Demand indications from North America continue to bolster confidence. In the US, MSCI data showed aluminium product shipments rising 13% y/y in January and February, while additional data showed North American mill product demand up 8% y/y during the same period. Given this was set against primary production rising less than 1% y/y, it is clear that genuine demand has played a key role in the stock draws and rise in premia, alongside the continued prevalence of financing activities.

Aluminium prices are expected to average $2250/tonne in Q2, 2012 and increase to $2500/tonne in Q4, 2012