By Taras Berezowsky
Perhaps it isn’t a surprise that at the first panel of Harbor Aluminum’s Outlook conference here in Chicago, China played a big role. But China didn’t overshadow the fundamental keystones to good intelligence and analysis that Jorge Vazquez and his team at Harbor provide, especially with the Detroit LME-approved warehouses making news the past couple weeks.
We at MetalMiner always like to be on the lookout for actionable intelligence to impart to our readers, and few do this better than Vazquez. In his initial workshop, entitled “Aluminum’s Key Industry Metrics and How to Read Them,” Vazquez and Harbor’s senior economist Jesus Villegas presented an eye-opening view into aluminum price forecasting.
Key among the important insights, in no particular order:
- Taking a close look at cancelled warrants (and what do they really mean, anyway?)
- How visible and invisible Chinese inventory levels will affect the market
- The role of Chinese coal prices
Vazquez emphasized that cancelled warrants are a prime factor in looking at total warehouse inventories – and this in turn has a lot to do with the lately notorious LME warehouses in Detroit. With a reported 7.2 million tons of global aluminum inventories (and some 2-5 million tons of those oft-reported “stealth” – or invisible – stocks) as of June 2011, it’s important to know what metal to count.
Essentially, metal that is deemed “on-warrant” is accounted for, held in a contract, and relaxing in one of the countless LME warehouses somewhere. “Cancelled warrants,” on the other hand, is metal that is earmarked to leave the warehouse, in Vaxquez’s words.
So, when looking at total inventory, you must do this simple calculation:
On-Warrant Inventory – Cancelled Warrants = Total Inventory Level
Some 12 percent of total inventory is composed of cancelled warrants. Ultimately, knowing the number of cancelled warrants at any given time – those stocks that are being shuttled out of the warehouses – is a good indicator of what demand and prices are going to do ahead. When cancelled warrants spike, it means demand is high, and more importantly, that future prices will be high.
To round out his talk on inventories, Vazquez made clear that one can’t just look at nominal levels (the 7.2 million-ton figure for June, for example), but how many weeks of aluminum consumption the levels cover. “It could cost you millions of dollars,” Vazquez said with no hint of hyperbole.
China Stocks and Coal
I bet you were wondering when we’d get back to China. Well, here we go.
Since it takes 15.3 MW per hour needed to produce one ton of aluminum, according to Vazquez, since China produces more aluminum than the rest of the world combined, and since most of China’s power generation comes from coal, it follows that coal prices in China are a key indicator of price. China has been very vulnerable to coal price fluctuation.
Lastly, a very telling figure is the current cash cost per ton of aluminum for China versus the rest of the world.
“As prices fall below Chinese cash cost – LME is trading at $2500, while china cash cost is a bit more than $2600 – it is not unreasonable for the Chinese industry to be 60-70 percent underwater.”
With the rest of the world’s cash cost at about $1800 per ton, that is quite a divide indeed.