Stockpiles of Chinese aluminium, will buyers make a move?

Written by Paul Adkins

Is it a good time to buy aluminium?

In a recent China Daily article, it was mentioned that China’s aluminum stockpiles have reached a new high. However, the Chinese demand situation is less certain than a scenario produced in a simple linear extrapolator. Key markets such as construction and machinery equipments are constrained by structural factors. Adjustments on property prices and advanced countries deleveraging mean construction and export market demand are suppressed.

Other demand such as in automobiles and even in consumer goods has been more flat than desired.

Additional capacities will come online in 2013, and this will put downward pressure on metal price, which will continue to deteriorate the smelters’financial positions. This fits the broad conceptual description of China’s structural dilemma: over-capacity in the aluminium industry + slow-recovering demand = a deflated metal price.

The possibility of a major destocking rose in the beginning of 2013; however, price continued to deteriorate while stocks fell for a few weeks.

The holiday season distorted the inventory data and a sudden jump in inventory levels occurred immediately after, which is no big surprise as the level of stock increase is similar to that of last year’s level. Yet while the trend of destocking has been broken, it is rather hard to make a call on the data.

 Invisible inventory is the hidden side of the inventory story. While there is no official account for the data, one can safely assume that it is expanding at the same rate as visible inventory. Therefore, it is still a good indicator of demand; and historical data does suggest a significant statistical relationship between the two.

 How about the SRB? This is really  about fiscal policy, isn’t it. After attending numerous macroeconomic and policy conferences, we get the feeling that fiscal policy will be tempered this time round. Secondary industry players are struggling and are hoping for some sort of fiscal relief. The mentality of moral hazard is deeply seeded in the working of China’s economic machine. However, China is facing a crisis, a structural dilemma if you will, and there is less incentive to pop up fixed investment again.

 Is it a good time to buy aluminium? The China Daily article suggests yes.

However, buying decisions are not solely made based on the price of input commodities, except for possibly traders. The two major questions are: is there enough end demand to justify buying? Is the buyers’ revenue outlook and total cost metric going to justify input commodity purchases? For a builder or car manufacturer, if the outlook for construction or automobile remains dim, then the purchase of metals would have to be carefully matched to future demand levels. It is hard to justify the stocking up of input commodities when future demand is going to be poor; and very possibly, the down-stream buyer may have inventory problems with its own production, this would discourage inventory building further, even if is cheap.

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