No End to Aluminum Woes Until China Changes Tack – by Laura Clarke (Wall Street Journal – November 28, 2013)

The price of gold might’ve stolen the spotlight in recent weeks, but aluminum’s own skid to a four month low is worthy of closer attention, not least because there are signs are that the metal’s 30-month downward trend is likely to continue unless China changes plans.

According to the World Bureau of Metal Statistics, the global aluminum market was in oversupply by some 1.23 million tonnes in the first nine months of 2013, following a surplus of 539,000 tonnes for the whole of 2012. With so much metal above ground, prices this week slumped to their lowest value since July 2009, at $1,744 a tonne.

At these levels, it is estimated that close to half of the world’s production is loss-making.

Even amid that astonishing fact, even more aluminum may come on to the market both before and after the April implementation of a London Metal Exchange rule change that will require warehouses with delivery queues longer than 50 days to load out more metal than they load in. Although market participants expect the resulting inventory reduction to come slowly, rather than as a sudden flood of metal from warehouses, the rules are expected to hit aluminum the hardest due to massive warehousing stockpiles.

Add to that a potential tapering of U.S. economic stimulus measures—a crucial support for base metal prices this year–and producers are unsurprisingly looking nervous.

This week, in response to a concerted lobbying effort by the largest global producer, United Co. Rusal, Russian Prime Minister Dmitry Medvedev ordered a study examining the creation of a state aluminum reserve—in essence, a fund to stabilize market conditions. Analysts are skeptical the government would take such steps, and say that even if it did, the impact could be negligible.

BNP Paribas Senior Metals Strategist Stephen Briggs said that the reserve would have to be huge to make a difference.

His reasoning: China. The nation accounts for around half of global production, and while Rusal and American competitor Alcoa have both announced production cutbacks this year, the key to next year’s market will be whether or not smelting companies in China choose to scale back capacity.

“I think the market is moving toward a balance, but what really needs to happen is a deficit, and that is not happening–the place that needs to be addressed in China,” said Mr. Briggs.

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