Mukhamedshin sees stable prices, with caveats

Reuters recently ran a story quoting Rusal’s Oleg Mukhamedshin as saying that aluminium prices would stabilise next year. Mr Mukhamedshin, who is Deputy Chief Executive of the company, predicted that prices would run between $1,600 and $1,700 in 2017. But he also put some very tight qualifications on his prediction.

According to Mr Mukhamedshin, these prices will be dependent on three factors. China must not increase production, global stocks must fall and demand must continue to grow.

We can probably grant Mr Mukhamedshin the third of his 3 wishes. There’s no analyst out there predicting demand to slow, certainly not on a global basis, with the only variation being whether demand would grow by 4%, 5% or some other number.

But the other two conditions are much more problematic. Perhaps the global stock of metal will fall, but there’s a problem with this wish. Nobody can state categorically that we know of all the metal that’s currently sitting in inventory somewhere. Chief among the invisible inventory area is China, where metal is often held as a security against loans to smelters. The recent shift to liquid metal transfers has also confounded the inventory picture. Liquid metal by its nature means there is no inventory, and with as much as 70% of China’s primary metal leaving smelters by crucible, it creates an artificial shortage of ingot. The more you sell in liquid form, the less P1020 25kg ingot you make.

Outside China, aluminium remains a financial instrument, and remains unclear exactly how much metal is tied up outside the official inventory points.

It’s also worth noting that metal prices failed to capitalise on the fall of official inventory levels in 2016. Even when the price tested $1700, it failed.

Mr Mukhamedshin’s first wish is the one that will have the least chance of succeeding, in our view. China still has a large amount of capacity sitting idle. When Chinese smelters shut down at the end of last year and early this year, they did not call in the demolition teams. There’s several million tonnes of idle capacity can re-enter at any time. If fact smelters have been gradually re-entering (but not by as much as we first thought), and with the average re-start requiring 2 months it could be the start of next year before we see the full effects.

There’s also several million tonnes of new capacity set to enter the market. Together, we think that China will increase metal production by at least 8% next year. (We will have more on this in our upcoming World Aluminium Monthly.) But an increase in China production is only a problem if the metal fails to stay inside China. If increased supply in China leads to increased exports, then Mr Mukhamedshin’s price target will look very shaky.

Another aspect to remember with aluminium prices is that they have been susceptible to changes in crude oil price. Presumably Mr Mukhamedshin is expecting crude prices to remain roughly where they are.

Mr Mukhamedshin is a highly knowledgeable expert on the global and China industry, and I have enjoyed my meetings with him. He is absolutely right to put these caveats on any prediction of forward prices (acknowledging that Rusal has a vested interest in stable higher prices), but it just means that what’s really going to happen next year is probably not what he predicted.