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ECONOMICS
Aluminium industry at the crossing
Has the worst come yet?
The view of Goran Djukanovic, Podgorica
The last several months of 2008 were
characterised by steep falls in the equity
markets, lack of liquidity among
some large investment banks and
other financial institutions and the
raising of government funds for their
rescue, constant falls of oil and commodity/metals
prices to levels not
seen since 2005 in some cases (base
metals especially), and a strong rally
of the US dollar against the euro and
other major world currencies.
October was the month when even
the greatest optimists, who only last
summer were betting on a continuation
of metals prices rises, realised
that the major world economies are
inescapably on the threshold of recession.
As a result, all major banks and
market research firms significantly
reduced their price forecasts for the
next two years compared to previous,
bullish prognoses, some of them
published even at the end of the third
quarter. Central banks worldwide,
one by one, are reducing interest rates,
preparing for a long and cold ‘market
winter’, with some leading economists
already predicting the worst financial
crisis since the Great Depression and
investors facing a grimmer climate for
business than they have ever experienced
in their lives.
According to Barclays Capital,
commodity investments held by professional
money managers sank 22%
in the third quarter, the first decline in
value in five years, as falling raw material
prices deflated portfolios. Assets
invested in commodities shrank to
US$ 211 billion at the end of September,
down from US$ 270 billion at the
end of June.
Consequently, October was also
the month with the biggest monthly
price decline for aluminium and copper
in the last two decades, and a
slump in equities and the rising US
dollar further increased speculation
that global recession will curb demand
for industrial metals. In a significant
price drop since 11 th of July,
when it reached the peak of the past
cycle at US$/t 3,291.5, and especially
during October, the aluminium price
underwent a ‘free fall’ to US$/t 1,876
on October 24, before it finished the
month at US$/t 1,970.5. Producers reacted
promptly by cutting production
in China, USA, Eastern Europe and
the Ukraine, and more reductions
are possibly on the way in Asia, Europe
and in some other regions too.
Volatile markets reacted by pushing
up the aluminium price to fluctuate
around US$/t 2,000 in the first week
of November.
Under these circumstances, traders
in Asian markets, above all, are waiting
to see even further falls in prices,
and are accordingly waiting until the
first quarter of next year before they
start to buy larger quantities.
During the time of economic boom,
when metal prices reach their record
levels, increased demand or even deficit
of one or two metals also positively
influence the prices of other metals.
Now is a time, by contrast, when almost
all world major economies are
turning down, while at the same time
most metals are already in surplus and
even demand has just started to fade.
With new capacities coming up in the
next couple of years and demand possibly
deteriorating even more in the
following months, even recent information
about capacity closures does
not help much. The rising US dollar
is also against metals prices. Finally,
when investors and funds once get out
of the market, they would need firm
signs of recovery before they decide
to turn back.
Because of all this, all eyes are now
looking towards China as the last hope.
Can China counteract the rest of the
world and push metal prices up again
soon? However, slowing Chinese exports,
mainly as a reaction to the economic
downturn in USA and Europe,
will also no doubt reduce that country’s
hunger for metals. While the US,
Japanese and EU economies are struggling
to remain above one, or even
zero GDP growth (to avoid recession),
Market analyst Goran Djukanovic
the Chinese government is seriously
concerned to slow down the country’s
GDP and industrial production
and the prospect exists that China’s
GDP may fall below the ‘critical’ and
usually mentioned 8% growth level in
2009, compared to 11.9% growth in
2007 and 9.5% expected in 2008.
Aluminium is different from copper,
for instance, whose production
costs have been much lower compared
to the price during the last
several years, meaning that copper
producers were making significant
profits. For aluminium, however, production
costs at more than a half of
the world’s smelters were close to the
LME price, even at the time when the
price was reaching record levels, as
was the case last summer.
That is the main reason why the aluminium
price cannot continue falling
for a period as long as, say, a quarter or
two, to the same extent as in the case
of copper, nickel and some other metals:
the producers will start cutting or
even stopping production to prevent
further losses, and this will prevent the
price from falling even further.
According to the CRU, 93% of all
smelter capacity in the world loses
money when the price falls below
US$/t 2,200. According to the author’s
estimation, the lowest-cost smelters
produce at around US$/t 1,500 at the
20 ALUMINIUM · 12/2008
G. Djukanovic