The Hindu Business Line : Aluminium prices may soften in short term

Mumbai, March 27 Aluminium prices may soften a tad in the short-term as most companies in China, which were shut after production costs rose above sales realisation, may resume operations soon, according to analysts with broking houses. The Chinese Government has taken measures to bring down the cost of production by providing electricity, one of the major production costs, at a concession.

Forward contracts rise

Aluminium for three months forward on LME jumped from its low of $1,279 a tonnes on February 24 to a high of $1,492 a tonne on March 20. Spot prices too followed the bullish price trend and rose to a high of $1,434 a tonne from $1,251 a tonne in the last one month. Large-scale aluminium imports by China’s State Reserve Bureau pushed up prices since January. In December 2008, the Reserve Bureauannounced a plan to buy 2.90 lakh tonnes of aluminium at $1,801-1,808 a tonne, with delivery in January. Mid-February, it said it would buy another three lakh tonnes at $1,829-1,830 a tonne for delivery by early April.

Stockpiling

Total stockpiling by the Reserve Bureau so far is equivalent to 66 per cent of China’s primary aluminium production in February. It may buy another four lakh tonnes of aluminium in the coming months, according to market sources.

In addition to the State Reserve Bureau buying, Chinese States have also been stockpiling the metal to provide liquidity to smelters. So far, three provinces, including China’s largest aluminium producing province of Henan, have announced plans to stockpile a total of one million tonnes of aluminium this year. This is higher than February’s output and will help absorb excess supply in the Chinese markets.

Spot prices

China’s domestic aluminium prices in the spot market have stayed above $1,757 a tonne for seven weeks since the Reserver Bureau’ss first bout of stockpiling ended late January.

As of mid-March, spot prices in Shanghai had risen 12 per cent from the December level, while three-month LME aluminium fell 9 per cent over the same period of time.

Increased buying by end users, including power grid companies and automakers, has coincided with SRB buying in the last few weeks. Fabricators in southern province of Guangdong have reported that demand for finished aluminium products has been better than they previously expected, although it remains weaker compared to a year ago. With the recent increase in aluminium prices, most of the greenfield smelters will start production, increasing supply in China. In fact, aluminium production has already improved slightly in February and January.

However, “in the near term, we highlight the risk that cheaper imports could easily dampen any widespread resumption of domestic capacity, unless domestic production costs fall,” said an analyst. The average smelting cost for primary aluminium in China at about $1,992 a tonne was 25 per cent higher than the world average cost of about $1,600 a tonne, mainly due to the higher power cost. If smelters in China use imported alumina and had access to lower electricity prices, their costs could be lower and their profitability would improve, he said.

To cut production costs and support aluminium smelters, China has allowed smelters to buy electricity directly from power companies to help them obtain cheaper prices. The move may cut smelting costs by around $212 a tonne at least, he said.