If you learned of a product that was about to see a ninefold surge in demand over 15 years, you’d be crazy not to start making it, right? Wrong. If you were in the commodity business, you’d first want to check what was about to happen to supply.
Take Chinese aluminum. Consumption rose from 3.4 million metric tons in 2000 to 31 million tons last year — but production capacity increased almost 14-fold, to 36 million tons. As a result, LME-traded aluminum forwards now cost about $1,650 a ton, almost exactly the same price as you’d have paid at the dawn of the millennium.
That supply-side problem explains why aluminum prices have consistently failed to fulfil the promise that fueled deals like Rio Tinto’s $38 billion 2007 takeover of Alcan.
“Oversupply pressure may mount again in the second half of the year,” Chalco, China’s second-biggest producer of the metal, said while announcing a 25 percent year-on-year sales drop in first-half results Thursday evening. “The market situation is still not optimistic.
Why does China keep producing this stuff? Well, much as a church in a medieval village provided social welfare, a community center, a marketplace, and basic population statistics, on top of its central religious role, Chinese aluminum producers do more than just churn out metal.
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