Goldman Sachs agrees with AZ China

Okay, it’s a slightly cheeky headline, but we at AZ China were delighted to see today’s Bloomberg story.

According to the story, Goldman Sachs has published a note that sees aluminum prices heading south in the coming months. The bloomberg story had this extract:

“We believe that persistent, solid margins will drive Chinese producers to restart,” Goldman analysts including Yubin Fu wrote. “Should China’s shutdown aluminium capacities resume production, we expect the bearish supply side dynamics will cause aluminium pricing to respond quickly.”

AZ China has been saying exactly this message to our clients since the end of April. We have reported many times that the burst of activity in March had to be matched by second and third purchase orders for raw materials. Once a factory has made the garden furniture or the air conditioner or the beer can, someone has to buy that finished good. Even if it goes into inventory, which factories can do given the easy credit that’s been available, it’s not likely they would further risk their cash flow by buying more raw materials.

So demand was always the unknown. The known side of the equation is the supply side. As Goldman Sachs reported (I can’t believe I agree with them), it takes weeks and months to go from a board room decision to restart to the time metal is flowing fully. It’s also a heavy investment, with outlays of anything up to RMB 100 million for a small potline. As Goldman says in the Bloomberg story, it takes many months to recoup the investment needed to restart a potline.

My worry is that a perfect storm is brewing. Supply is building inside China, while demand is being tested. Already we are seeing the futures price slip well below the physical price, so it’s clear the market does not expect demand to remain strong relative to supply. Goldman says it will take another few months before we see all the returning metal units.

I am worried the metal price could fall quickly and steeply. It would not surprise me to see that the price get down to as low as RMB11,000 and give back all the gains of the last 3 months. The perfect storm element is that a price of RMB11,000 will not be enough to force smelters to close their doors once more. The cash cost of production is also falling, and anyway, who wants to close after spending millions to re-open?

It means that one or maybe two outcomes will ensue - the price fall will be steeper than RMB11,000 (therefore taking the LME down with it), and more metal will be available for export. Neither scenario is good for the international aluminium community.

Meantime, Goldman Sachs clients are welcome to sign up to AZ China’s reports and services - we are much cheaper than Goldman, and our information comes to you at least a month before Goldman, based on this note.