Aluminum costs seen dropping as LME unclogs depots

Waiting times lengthened to a year or more

‘Unprecedented Intervention’

United Co. Rusal, the world’s biggest producer, said last month that the LME should postpone the changes because it would further distort the market. The “unprecedented intervention” will accelerate the delivery of another 2 million tons onto the market, Chief Executive Officer Oleg Deripaska said in a statement Sept. 25. Alcoa Inc., the largest U.S. aluminum maker, said it would harm producers without helping consumers.

The Midwest surcharge, the U.S. benchmark, will drop 22 percent to 8 cents a pound by the end of June, the Bloomberg survey showed.

Even with the projected decline, premiums will still be about 23 percent higher than the 10-year average, according to data compiled by Bloomberg. Alcoa, based in New York, will report a 7.7 percent increase in the most widely forecast measure of profit to $282.08 million this year, the mean of 12 analyst estimates shows. Shares of the company fell 8.3 percent to $7.96 since the start of January and will reach $8.33 in 12 months, based on the average of 15 forecasts.

Warehouse Congestion

Rusal, based in Moscow, will report profit of $190.5 million, from a $55 million loss in 2012, the mean of seven estimates shows. Its shares slumped 51 percent to HK$2.39 this year and will rebound to HK$3.16 in 12 months, according to the average of 14 predictions.

The LME’s plan won’t be enough to alleviate the warehouse congestion that is increasing costs for consumers, a group which includes the Washington-based Beer Institute and American Beverage Association, said in a letter last month.

Global costs were inflated by $3 billion in the past year by the “unfair” rules governing deliveries by depots, Tim Weiner, a global risk manager at Chicago-based MillerCoors LLC., said in written testimony before his appearance July 23 at a Senate hearing. Warehouses are owned by companies including Goldman Sachs Group Inc., JPMorgan Chase & Co., Glencore Xstrata Plc and Trafigura Beheer BV.

Capacity Cuts

Global economic growth that the International Monetary Fund says will accelerate to 3.8 percent in 2014, from 3.1 percent this year, still won’t be enough to erase the glut. Supply will exceed demand by 350,000 tons next year, Deutsche Bank said in a Sept. 25 report. Producers already announced capacity cuts of 1.4 million tons through the middle of next year and may add another 500,000 tons to that by the end of it, according to the bank.

The cuts may be offset by rising output in China, which makes almost half of the world’s aluminum. Output there will expand 7.9 percent next year and 8.1 percent in 2015, Deutsche Bank estimates.

State Subsidies

Curbs may be partly delayed because of government intervention to preserve jobs, according to the London-based International Aluminium Institute, which represents producers. At least 960,000 tons of unprofitable capacity from New Zealand to Bosnia is supported by state subsidies, Deutsche Bank says.

“The high level of premium perpetuated by the queues has been keeping a lot of smelters in business which shouldn’t have been there,” said Colin Hamilton, the head of commodities research at Macquarie in London. “The market has to rebalance and it can only be balanced by shutting off capacity and you need the prices to go down to shut off that capacity.”

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