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I hope you guys are having a good trip. I am working on scheduling a
time for a presentation walk thru by Ronnie, Curt and Thad with Ann -
Marie. I thought you might want to see this article since it mentions
Alcoa. I have actually met with Klaus Kleinfeld, Alcoa's CEO, on
several occasions. I would not hang our hat on that information or
contact but he does understand the need to assess political risk. We
would like to do next week if possible but I am leaving the scheduling
in Ann-Marie's capable hands. Michael.

Aluminium hots up as supplies start to buckle

By Jack Farchy
Published: February 9 2011 17:44 | Last updated: February 9 2011 17:44
For much of the past two years, aluminium was the metal everyone loved
to hate. While copper, the darling of hedge funds, has raced to one
record after another, hitting $10,000 a tonne last week for the first
time, aluminium, the most widely used metal after steel, lagged far
behind.

Energy factor
Producing aluminium requires so much energy some traders joke the
metal is “congealed electricity”. On average it takes about 15.7
kilowatt hours of power to make one kilogram of aluminium from
alumina, an intermediate compound, meaning electricity accounts for
about 40 per cent of production costs.
For that reason, some bulls argue, aluminium prices are set to rise
sharply in the long term as energy costs rise. The current supply
curbs in China, they say, are a glimpse of what the market has in store.
As Klaus Kleinfeld, chief executive of Alcoa, the US aluminium
producer, said recently: “Whenever I go around, people are saying, my
God, wouldn’t it be great if aluminium would be like copper?”

Such disparaging words may be a thing of the past. The lightweight
metal, used in consumer and industrial products from cars and aircraft
to drinks cans, has recently been winning favour in the metals
community. Strategists at RBS have made it their top pick for 2011,
while Macquarie, Barclays Capital and Deutsche Bank have also turned
bullish.

Investors are beginning to take note. Hedge funds have begun to unwind
one of last year’s most popular trades – that copper would outperform
aluminium – by buying aluminium and selling copper. That helped push
the benchmark aluminium contract above $2,500 a tonne for the first
time since September 2008: on Wednesday it hit a two-year high of
$2,575.25.

Unlike copper, however, aluminium remains a long way from its peak of
the last cycle, $3,380 in July 2008. Indeed, copper is now nearly four
times as expensive as aluminium – the highest such ratio on record.

That alone is one reason some believe aluminium could rally.
“Aluminium is set to play catch up and redress the imbalance,” says
Nick Moore, head of commodity strategy at RBS.

More important, though, is a change in perceptions about the balance
of aluminium supply and demand.

EDITOR’S CHOICE
Glencore takes step closer to flotation - Dec-24

Glencore opens up equity capital to outsiders - Dec-23

Copper and oil prices climb - Feb-04

Copper hits record $10,000 a tonne - Feb-03

Commodities daily: Digging into miners’ results - Jan-26

The most significant change is in China, where aluminium production –
a notoriously energy-intensive process – has been curbed by the
government’s push to reduce power consumption, culminating in power
being cut off to smelters late last year.

The sharp fall in Chinese aluminium production, from about 17.5m to
14.5m tonnes on an annualised basis, has changed the balance of supply
and demand in the country. Traders say that aluminium stocks in China
are very rapidly being drawn down towards critical levels of about one
week’s consumption, despite sales of 213,000 tonnes in December from
the State Reserve Bureau, the government stockpiling agency.

That means inventories on the Shanghai Futures Exchange – the visible
part of China’s aluminium stock – could fall sharply. The country
could even be forced to turn to the international market for supplies,
driving prices higher. Alcoa has predicted that Chinese demand will
outstrip production by 700,000 tonnes this year even as the rest of
the world has a surplus aluminium output.

Adding to that, traders and analysts have been surprised by the
strength of aluminium demand: global consumption of the metal will
rise 12 per cent this year, according to Alcoa forecasts, after a 13
per cent rise last year, with the growth coming as much from the US
and Europe as China or the Middle East.

A final upside risk to the aluminium price is the potential for the
launch of new exchange-traded funds that buy up physical metal. The
first two such investment products are slated to launch this quarter:
ETF Securities, which in December launched ETFs in three LME-traded
metals, has said it hopes to bring an aluminium ETF to market, while
Credit Suisse has filed an application at the London Stock Exchange to
launch its own aluminium ETF after earlier trying to launch the
product in Switzerland.

All this makes a quick spurt to about $2,700 or more a tonne likely,
some analysts and traders believe. But their bullishness is tempered
by the massive overhang of aluminium inventories, which were built up
when manufacturers slashed production during the financial crisis.
There are 4.6m tonnes of aluminium in LME-registered warehouses and by
some estimates total global stocks could be in excess of 10m tonnes.

The existence of huge stockpiles has not led to a price crash because
they are mostly locked up in long-term financing deals held by banks
such as Deutsche Bank and Goldman Sachs or traders such as Glencore,
keeping them off the market. However, the deals rely on a combination
of low interest rates, financial incentives provided by warehouses and
the fact that aluminium for delivery soon has traded at a large
discount to longer-dated futures. Already that discount – called the
“contango” – has narrowed significantly, while premiums paid in some
locations above the LME price have reached record levels – both
indications of tightening physical markets.

If things turn out as the aluminium bulls predict, the rise in prices
could have the effect of squeezing the international market until
metal starts to come out of financing deals. Already, traders and
bankers say, profitability has been significantly reduced on financing
deals, making them shorter-term in nature and only available to those
able to secure bargain warehousing rates.

Thus the bullish call comes with a hefty caveat. “Be wary of holding
on for too long,” says Max Layton of Macquarie. “There is a cap to
prices.”

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