Market Briefing - July 21, 2008

Aluminium cash prices remain in excess of $3,000/tonne prices, with support coming from rising energy costs, power shortages, a weakening US dollar. The wider fundamentals (i.e. a market in surplus) are little changed. LME inventories have risen by a further 20,000 tonnes in July to around 1.115m tonnes in the middle of the month. Our supply-demand analysis suggests that inventories will remain in excess of 1m tonnes for the remainder of 2008 and 2009. In addition we note a relatively high level of producer stocks (1.67m tonnes as reported for May by the IAI – its highest level since February 2006). The most recent supporting factor for aluminium prices has been an announced a 5-10% cut in production by Chinese smelters in response to the recent hike in energy costs. We doubt whether these cutbacks will be implemented in full.

Power shortages provide the main upward impetus for prices
Once again power-related incidents have supported aluminium over the last month or so. Alcoa has idled around 120,000 tpy of capacity (roughly half) at its Rockdale smelter in Arizona.

Chalco, China’s largest producer of aluminium, is halting production at a 280,000 tpy operation in the northern province of Shanxi again, because of a power shortage. The provincial government ordered smelters in the region to cut capacity to ensure power supply for farming. It is reported that power shortages may have halted 700,000 tons of capacity in Shanxi, which is around 5% of national output.

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