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Listen: Aluminum analysis: LME stocks, spreads and 2018 outlook

London Metal Exchange aluminum stocks have plunged steeply this year. In this podcast, S&P Global Platts editors Vicky Bakourou and Mayumi Watanabe discuss causes behind the fall, analysis of the market fundamentals and outlook for 2018.

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Podcast Transcript

LME stocks, aluminum spreads, and 2018 outlook

With S&P Global Platts metals editors Vicky Bakourou and Mayumi Watanabe

MAYUMI WATANABE: Good morning, good evening everyone. I am Mayumi Watanabe, covering Japanese aluminum market out of Platts Tokyo office and today we have here with us Vicky Bakourou, pricing specialist in our London office. The total London Metal Exchange stocks of 11 metals declined by 40% from the beginning of the year, suggesting that warehouse operators may possibly lose revenue opportunity of several thousand dollars in a day. This is due to aluminum.

Today, Vicky and I will be discussing what the stock decline implies for the wider market. Vicky, what is the latest from London on the global LME aluminum stocks? Is there aluminum left at Vlissingen?

VICKY BAKOUROU: The global stocks stood at 1.1 million mt on December 14, up slightly this week. However, that figure would be almost 50% down since the beginning of the year. Live on warrant stocks had reached levels not seen since 2007 last week, although currently close to 890,000 mt. Vlissingen stocks have decreased more than 80% on year, and are currently at 71,525 mt. However, still almost half of total LME stocks are in Europe.

MAYUMI WATANABE: And the remaining half is in Asia, as primary aluminum stocks in the US have decreased dramatically. The Asian stocks champion is Busan in South Korea. Busan stocks are around 130,000 mt, down from 400,000 mt earlier this year. The US market premium was high and this pushed the outflow from the Asian warehouses to the US.

The stock cancellations were high from March to May, and during these months, the spread between the US and the Japanese and the Korean spot premiums widened to $100 or more. Usually the US premiums are $60-$70/mt higher than Asia due to differences in freight.

VICKY BAKOUROU: The European situation I would say is slightly different. In the first half of the year, higher US premiums attracted metal from Europe and warrant cancellations rose. However, despite the depletion of queued stocks in Vlissingen earlier in the year, stocks in Rotterdam are still high although lower compared to a year ago. Rotterdam accounts for 35% of total LME stocks.

MAYUMI WATANABE: I have a feeling we are at a turning point. The US premiums are still $100/mt above the Asian level and the spread remains wide. However, warrant cancellations in Busan seem to be peaking out this month to 25,000 tons, compared to 170,000 tons cancellations in the second quarter.

The total LME stocks have been increasing this week and have been holding above 1.1 million mt so far this week, due to metal delivered into Malaysian and South Korean warehouses. The gap between the Asian and the US premiums will narrow as the Asian premium will catch up with the US level. Vicky, is there an actual tightness in the European market?

VICKY BAKOUROU: That's an interesting question, Mayumi. There are a few market sources believing that potential supply tightness could hit the European market in the first to second quarter of 2018. So far, we haven't seen any tightness on the spot market. As I mentioned previously, most of LME stocks are currently located in Europe and off-warrant stocks are around 1.2-1.5 million mt, according to market estimations. There is the argument that there is not enough metal coming to Europe, which is not entirely true. There is definitely less metal coming than it used to but Europe doesn't seem from where we stand now to be a market on the verge of supply tightness. How about in Asia, Mayumi?

MAYUMI WATANABE: In Asia, we have a two tier market. Some Australian brands are tight, trading five to ten dollars above other non-Australian brands. Australian metal is duty free in many Asian countries so it tends to attract more buyers than other origins. If you are looking for any metal of any origin, you are comfortably supplied. Some traders have built up some stocks to prepare for a possible rise in demand in China following winter output cuts.

They may be releasing their stocks depending on the LME spread and their capability to control warehousing, financing and other costs, because China winter cuts have been slow. Winter cuts were implemented on November 15 and in the last month, Shanghai Futures Exchange stocks have risen almost 10%, rather than decline. May be LME stocks will fall below the 1 million mark but Chinese stocks are swelling to 2 million mt or more.

VICKY BAKOUROU: LME warrant cancellations rate has slowed down over the past few weeks, however stocks are in levels not seen in years. Most of the cancelled metal in LME warehouses has gone to physical storages in other locations of southeast Asia or has changed warehouses even within the same port as people took advantage of spreads and storage incentives.

Some of the metal probably found its way to the US as well but there is not an open arbitrage window as earlier in 2017. The fall in LME stocks made people worried about a potential spread tightness. Indeed, we saw some easing on the cash- December spread, however, after the Dec date contango is wider. Spreads so far seem well-supported which would also be supportive for physical premiums.

On SHFE, as Mayumi mentioned, stocks have reached record highs at 714k mt last Friday up 1.8% on week. That along with less than expected winter cuts has led SHFE futures prices lower. It seems that there is price correction on both SHFE and LME futures, as market's expectation for a supply tightness because of the announced Chinese capacity cutbacks has started fading away.

That being said, on the LME over the past weeks we have noticed a continuous liquidation of long positions from money managers. Currently net long positions stood at 122,000 lots for the week ending December 8, which has added extra pressure on prices as we move towards the year-end.

MAYUMI WATANABE: To wrap it up, as we are towards year end, what to look at on 2018?

VICKY BAKOUROU: First of all, as probably mentioned before, Chinese winter cutbacks are key for the market. Many analysts expected a deficit for next year but slower than expected capacity cuts could jeopardize that forecasts. We have seen analysts’ and banks’ price forecasts and so far many of them are bearish on aluminum unlike other base metals such as copper.

MAYUMI WATANABE: Absolutely. China has done supply-side reforms, impactful in some sectors, not so impactful in others, and the question is, how about the other side of the coin, China’s demand? So far, capacity cuts from ferrous to non-ferrous sectors have not resulted in high unemployment and slowdown in personal consumptions and other forms of demand, but it may be too early to tell.

VICKY BAKOUROU: Then, we have US-China trade wars. We still don’t have a final decision on 232 section and the anti-dumping measures against China on aluminum foil. The report is set to come out soon and people are cautious that tariffs might be imposed so they are not selling off units at year end like typically happens.

Because of this and decent spreads, market players are speculating premiums will rise come the new year. On late November, US Department of Commerce self-initiated, for the first time in over 25 years, antidumping and countervailing duty investigations for imports of aluminum sheet originating from China.

MAYUMI WATANABE: And I would not be surprised, if China reached out to acquire extruders, rolling mills, smelters, refiners and mines outside of China, and, or build new plants, to establish themselves outside of China. China’s Zhongwang has failed to acquire US extruder Aleris but Chinese market participants may be trying their expansion elsewhere.

VICKY BAKOUROU: Another interesting story could be freight rates. I heard recently a senior person from the largest container shipping company warning on global trade and container freight rates fragility. Shipping it’s a traditional sector and supply- demand is important. Analysts’ forecasts show a slower growth for container freight rates in 2018 and supply exceeding demand.

It would be interesting to follow that as freight is an important cost. Last but not least, we saw a rise over the past year on CPC and anodes costs. Platts US Gulf CPC assessment rose to $385- 410/mt FOB US Gulf ports in November from $225-240 in November 2016 and from $235-245 in January.

MAYUMI WATANABE: Thank you for a nice analysis.

VICKY BAKOUROU: Thank you everyone for joining us today for the last Platts Metals podcast for the year 2017. We look forward to talking with you more in 2018 and wishing you a happy holiday season.