Aluminium prices may fall further: Sucden Financial

Aluminium prices may have further to fall as sentiment continues to become more bearish on the eurozone debt crisis and slower economic growth in the US, Sucden said in its quarterly metals report Wednesday.

The brokerage said that there were a lot of "cross currents" affecting the aluminium market in the second quarter that looked likely to remain in place over the third quarter.

A combination of weak macro data, high production levels, oversupply, potential raw material tightness, lower consumption and high LME stocks have all contributed toward a contradictory market.

However, Sucden said that looking further forward the market could come back into balance.

"With benchmark LME aluminium prices falling, it may be that more production cuts follow, which could start to reduce some of the inconsistencies in the market," Sucden said.

The brokerage said that the fundamentals for aluminium remain bearish with the World Bureau of Metal Statistics showing a supply surplus of 482,000 mt in the first four months of 2012.

This followed a surplus of 1.73 million mt for 2011, it said.

On the financial and warehousing side of the market, metal is moving into off-warrant locations with a good proportion of the stock tied up in financing deals.

"The ever-increasing premium levels, currently in excess of $200, are also having a two-fold effect. 1) increasing the viability of financing deals and 2) giving an additional cushion to marginal production thereby decreasing the likelihood of large scale production cuts," Sucden added.

However, the brokerage said that it was surprised that more production cuts had not been announced, but noted that 30 million mt of the 50 million mt global production of was still profitable.

It added that 10 million mt is marginal, while 10 million mt is cash-negative.

"To remain operational, the marginal 20% is supported by an assortment of higher physical premiums; lower alumina prices; lower energy prices due to some power tariffs being linked to LME aluminium prices; government subsidies where some local governments -- China, Australia and Brazil -- do not want smelters to close for socioeconomic reasons; and because some have hedged," Sucden said.

The brokerage added that another factor that could push producers toward implementing cuts was the potential ban of bauxite exports from Indonesia.

"In 2011, one third of China's alumina production relied on imported bauxite -- the country imported 45 million mt of bauxite, 80% of which came from Indonesia," it said.

On the demand side, Sucden said that aluminium consumption had suffered as a result of the deteriorating economic outlook.

However, it noted that aluminium was being used in a growing number of end-use sectors with strong growth in the automotive sector.

"Another area that is enjoying strong aluminium growth is in the wire and cable industry where aluminium is gaining market share from copper because of the price differential," the brokerage said.

Sucden is forecasting aluminium prices to trade in a $1,800-2,100/mt range across the third quarter.

Three-months aluminum was trading at $1,880/mt on LMEselect at 1107 GMT.