Russian aluminum giant Rusal is pressuring peers after reporting a 95% drop in profits for H1 while cutting production expectations and dimming its growth outlook for the sector. With aluminum prices near three-year lows, Rusal plans to trim ~150K tons of production before the end of 2012. AA -0.8%, KALU -0.2%, ACH -2.9%, NOR -0.3%.
About 30% of aluminum producers are unprofitable, says a Rusal exec, and he hopes China will join his firm in standing ready to cut output to help support prices. "This has gone on for long enough, and all producers should take responsibility ... and more actively cut unprofitable production."
China's major aluminum producers, including Chalco (ACH), are cutting output by 10% from June 1, stung by rising import prices of bauxite at a time of industry overcapacity. It's finally the Chinese production cut Alcoa (AA) CEO Kleinfeld has been calling for.
Chinese aluminum production rose 18% through February, confounding a January prediction by Alcoa (AA) CEO Klaus Kleinfeld that the country's capacity would be sharply cut. Alcoa and Norsk Hydro (NHYDY.PK) - responding to market barometers like plentiful supplies and falling prices - have made production cuts, but China has its own set of signals.
Alcoa's (AA) shuttering of capacity followed by Norsk Hydro (NHYDY.PK) and surely to be followed by others are to be applauded, writes Andy Home, but they may not have much impact thanks to China, where production swings more in a single month than all of the announced cuts combined.
Goldman is lowering its 12-month aluminum price forecast to $2,400/ton, from a prior $2,650/ton, though the new target still represents a healthy increase from aluminum's current price of less than $1,900/ton. The firm expects production cutbacks from Chinese companies, some of whom are losing money, to bolster prices. Aluminum makers such as AA, NOR, CENX, ACH, and KALU have had a rough year.
This year's slide in aluminum prices may have made at least 25% of the world's smelters unprofitable, and could lead to a significant cut in production by 2012 Q1. The last cycle of cutbacks in 2009 signaled a bottom in the market, with aluminum prices rallying 37% in the following 6 months. ALUM -32% YTD.
"We have certainly seen a slowdown," admits a Rio Tinto (RIO) VP of demand for aluminum, but "the wheels are not falling off yet in terms of demand." He says Asia remains "pretty good," North America is flat, and the weakness is coming from Europe. Shares -1.5% premarket.
Stock market declines could be a precursor to even sharper drops in commodity prices if history repeats itself, writes Stuart Burns at MetalMiner. Metals sensitive to economic production are especially at risk. Commodity decliners today: Aluminum (ALUM) -1.4%, Copper (JJC) -3.9%, Tin (JJT) -1%, Steel (SLX) -3.7%.
Storing about 1/4 of global aluminum inventories in warehouses in a dilapidated area of Detroit, Goldman Sachs has created a cash cow and accusations of conflicts of interest. Consumers are complaining they can't get their hands on the metal even as inventories continue to pile higher. "It's not a true shortage," says a procurement officer.
Point, counterpoint: Ian Dogan says copper's tremendous post-GFC move combined with high LME stocks continue to make it an attractive short. Going long aluminum may be a good companion trade as it has become an economical alternative to copper.
Alcoa (AA +2.1%) upgraded to Buy from Neutral at Goldman Sachs, with the 6-month price target raised to $22 from $17. "We view the structural industry change, driven by the de-linking of alumina from the aluminum price, as a potential major long-term contributor to Alcoa, which is the largest global third-party alumina seller."
Shares of aluminum producers rise in China on word $10.7B of smelter projects will be scrapped to reduce overcapacity in the industry. Aluminum prices continue their rise, touching the highest level since September 2008. Producer ETF: ALUM +5.1% YTD. Aluminum ETF: JJU +8.0% YTD.
Strong fundamentals combined with the unwinding of a crowded hedge fund trade could send aluminum far higher. Cutbacks in Chinese production are being met with increasing demand, a recipe for rapid draws on stockpiles and popping prices. AA -1.4%. ETFs: JJU, ALUM.
The Global X Aluminum ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Solactive Global Aluminum Index.
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