Aluminum is bearish until the late third quarter
The seasonal pattern for aluminum is bearish until the late third quarter and if the current downward price trend remains intact, London Metal Exchange aluminum prices could fall as far as $1,800 a metric ton by year’s end, said a metals consultancy on Wednesday.
Aluminum prices have been in a downtrend since the third quarter of 2011 and there is no short-term end in sight to change this trend, said Jorge Vazquez, managing director of Harbor Aluminum Intelligence Unit at his firm’s Aluminum Outlook Summit in Chicago.
Prices are around $1,970, which is below the cash cost of production of about $2,100 a ton, he said. Historically, aluminum producers have enjoyed a 25% cash profit margin since 1970, but they are now suffering a negative 5% return. There’s been only three times that margins were negative – now and in 1982 and 1985, he said.
The low price of LME aluminum has caused primary aluminum smelters to cut back production, a trend that is unlikely to end anytime soon as LME prices need to be above $2,550 quickly to avoid further curtailments in the producers outside of China. Chinese smelters need to see Shanghai Futures Exchange prices above $2,650 to avoid widening its current deficit, Vazquez said. The $2,650 level is estimated to be the long-term equilibrium, he added.
Given this data, prices are severely undervalued under cost criteria, long-term equilibrium price estimates, consensus price forecasts, physical market indicators, visible inventory levels and market balance expectations, he said.
Because of the curtailments, Harbor is forecasting this year than China will have a supply deficit of 353,000 tons while the rest of the world will be in a 284,000-ton deficit. In 2013, China’s deficit will grow to 1.2 million tons, while the rest of the world’s deficit will shrink to 236,000 tons. Those figures include only announced cutbacks and are also based on planned expansions occurring.
Judging by that data, this should imply a floor of $2,000 and a ceiling of $3,000, but that doesn’t mean that prices can’t slump further.
Looking toward 2013, Vazquez said Harbor plotted the views of more than 70 aluminum analysts and the consensus price forecast was $2,443, with the highest price being $2,850 and the lowest $2,205. “In the last 10 years, prices did not go under the most bearish analyst’s estimate,” he said, although added that anything is possible.
Prices may fall further, but perhaps by year’s end be in a bottoming pattern. “We should expect much higher prices by the second half of 2013 and all 2014,” he said.
Vazquez added that given industry forecasts and historical patterns, aluminum producers and end users should hedge their 2013 and 2014 metal needs at current price levels. To even risk, he said they should buy in “June 2012, September 2012 and March 2013 at prices no higher than $2,200 per ton for 2013 and $2,300 for 2014.