(Repeats Feb. 11 column. The opinions expressed here are those of the author, a columnist for Reuters)
By Andy Home
LONDON, Feb 11 (Reuters) - “The aluminium market continues to, in our view, face the greatest bearish fundamental shock in a generation, and perhaps, in its history.”
That shockingly bearish view comes from Goldman Sachs, which has just slashed (again) its short- and medium-term price forecasts. (“Metal Detector”, Feb. 8, 2016).
The Wall Street heavyweight is now projecting aluminium will trade at $1,350 per tonne on a 12-month horizon, down from its previous estimate of $1,550. On the London Metal Exchange (LME) three-month metal is today trading just shy of $1,500 per tonne.
Goldman highlights the current toxic mix of bear drivers pressuring the aluminium price; slower demand growth, over-production, a flat and falling cost curve and rising Chinese exports.
“Historically, substantial global demand recoveries have tended to ‘rescue’ the aluminium market and result in its turn, something we do not expect to occur over the next 12-24 months.”
Except that last part isn’t quite true.
Faced with a generational crisis, the world’s producers have failed to remember how a previous generation reacted to a similar aluminium crisis.
Back in late 1993 the world was also awash with aluminium and the LME price was languishing at what was then an all-time low just above $1,000 per tonne.
Indeed, there was so much aluminium around the LME relaxed its warehousing rules to allow metal to be stored outside because Rotterdam operators had simply run out of storage space.
It wasn’t Chinese exports that were swamping world markets back then. It was Russian exports.
These mushroomed from 274,000 tonnes in 1990 to 1,521,000 tonnes in 1993, according to a working paper written for the World Bank. (“International Commodity Control”, by Christopher Gilbert, November 1995).
“Actual exports in 1993 may have been significantly in excess of this reported figure,” Gilbert noted.
The cause was the collapse of the Soviet Union and the disintegration of the once-mighty industrial-military complex that had absorbed almost all domestic supply.
The knee-jerk reaction by Western producers was to launch anti-dumping measures against the Russian Federation with the European Commission initiating trade restraint talks in November 1993.
What actually emerged from those crisis talks was an altogether different outcome.
The Russians understandably insisted that if they exercised production and export restraint, others should too.
But how could Western producers commit to coordinated cutbacks without running foul of anti-trust regulation?
The neat solution was to get governments themselves to negotiate a “memorandum of understanding” (MoU) with the Russians.
The deal was inked in Brussels in January 1994 by representatives of the Russian Federation, the European Commission, the U.S., Canada, Norway and Australia.
In exchange for a Russian commitment to cut 500,000 tonnes of capacity, it was “understood” that everyone else would do their bit to address the global over-supply of aluminium.
Or in the lawyerly words of the MoU, the necessary adjustment would be made by “way of worldwide market oriented commercial decisions by companies on an individual basis”. (“Aluminum in 1994”, USGS Minerals Resources Program)
Over the ensuing six months Western production rates, as reported by the International Aluminium Institute, fell by around 1.5 million tonnes annualised.
A sidebar to the main deal was that further unilateral anti-dumping actions would be “inconsistent with this MOU”.
By the end of 1994 LME inventories had fallen by a third and the price had almost doubled to $1,995.
Gilbert, writing for the World Bank a year later, was wary of linking the price recovery to the MoU, noting that other metals prices had also risen over the course of 1994, largely on the back of recovering demand.
However, he conceded that “this conclusion contrasts strongly with the dominant view in the aluminium industry which attributes a significant effect to the MoU.”
Fast forward 20 years and the aluminium industry is in renewed crisis.
The LME price is foundering close to the lows recorded in the Global Financial Crisis of 2008-2009.
Stocks are huge, although most of them are no longer visible in exchange inventories.
The list of producer casualties grows ever longer. U.S. producer Noranda Aluminum has just entered Chapter 11 bankruptcy and is preparing to wind down its New Madrid smelter.
That is another nail in the coffin for the U.S. smelter industry. Other producing countries such as Brazil have entered what looks a terminal tail-spin.
The pressure for trade action against Chinese exports is growing.
Yet the irony is that large parts of China’s own aluminium industry are in obvious distress with some of the country’s biggest producers calling for government help in the form of “strategic” stockpiling.
And it all could get worse still, if you believe Goldman Sachs.
The bank has a history of grabbing the headlines with its price forecasts and this latest is no exception. But it’s not the only super bear out there.
Analysts at Macquarie Bank recently wrote that “the base case aluminium surplus we have in our supply-demand balance simply cannot happen” because “the market will not be able to sustain inventory build of this level, even with strategic stockpiling”. (“Commodities Compendium”, Jan. 18, 2016)
Government intervention in commodity markets seems such an old-fashioned 20th century idea.
Yet when it comes to aluminium production, governments are already deeply involved.
Beijing is trying to strike a deal with some of its most-indebted producers, whereby financial assistance with stockpiling is exchanged for capacity cuts. It is working against some of its own regional governments, who have for years been helping local plants, most often in the form of power subsidies.
In the U.S. the Massena West smelter has only been saved from closure by financial assistance from the New York state government. On current form, it may end up being the last one operating in the country.
There is no shortage of similar discreet government assistance around the world.
Maybe it’s time for a bit more mutual rather than unilateral self-help. A grand intergovernmental bargain may seem a far-fetched idea. But it was equally far-fetched back in 1994.
And without one, the immediate future for what producers like to call “the metal of the future” looks very bleak indeed.
Editing by Susan Thomas