China Aluminum Sales for Use in Beer Cans Foiling Deficit

Aluminum factories in China are rolling more metal into shapes for beer cans and cigarette packaging, maintaining an eighth year of surplus even as producers from Alcoa Inc. (AA) to United Co. Rusal curb output.

China, which accounts for half of the world’s aluminum, will produce 2.5 million metric tons more than it uses in 2014, exceeding the 2 million tons of capacity cuts elsewhere since 2013, Morgan Stanley says. While most of China’s surplus is staying home, its shipments of processed metal are growing. The net global surplus will be 160,000 tons, according to the median estimate of 10 analysts in a Bloomberg survey.

Fabricators have an incentive to unload supply. With tariffs making exports unprofitable for typical 25-kilogram (55-pound) blocks, more metal is turned into sheets, foil and plates that fetch government rebates. Output of aluminum products in China surged 25 percent in April from a year earlier and exports in March were the highest since the record in 2011.

“Semi-finished fabrications will continue to grow this year, especially in capacity,” said Paul Adkins, the managing director of AZ China Ltd. in Beijing who has worked in the aluminum industry for three decades. “Factories are looking now for export opportunities.”

Aluminum, used in everything from aircraft to window frames, is little changed this year at $1,799.25 a ton on the London Metal Exchange, after dropping as much as 7.7 percent from a five-month high April 11. The Standard & Poor’s GSCI gauge of 24 commodities is up 3.5 percent in 2014, while the MSCI All-Country World Index of equities rose 2.1 percent and the Bloomberg U.S. Treasury Bond Index advanced 2.7 percent.

Prolonged Surplus

Aluminum output expansions in the Middle East and China’s Xinjiang region are adding to the surplus, Morgan Stanley says. The Asian country’s shipments of aluminum products, including sheet, plate and foil, rose 10 percent in 2013 to 3.1 million tons, the most since at least 2004. The total is equal to about half of European demand, according to the bank.

In April, China produced 4.07 million tons of aluminum products, up 25 percent from 3.26 million tons a year earlier, the National Statistics Bureau data showed yesterday.

China produced a record 25 million tons of primary aluminum last year, or 49 percent of global supply, according to Credit Suisse Group AG. Demand, including metal turned into semi-finished products and exported, was 24.88 million tons, or 49 percent of the world total. This year, China will use 26 million tons, Edinburgh-based consultant Wood Mackenzie Ltd. said.

More Fabricating

“China is capable of exporting large volumes to the rest of the world,” said Edgardo Gelsomino, a Wood Mackenzie analyst in London. “Any ton of aluminum semis or aluminum fabricated products exported from China will reduce demand for aluminum outside China.”

China has a 15 percent tax on exports of aluminum blocks called ingots, and exempts shipments of alloyed products, according to CRU, a London-based metals consultant. That creates an incentive for fabricators, Wood Mackenzie’s Gelsomino said. A 10-ton block can be converted to a foil so thin it is used in cigarette packs.

Stockpiles tracked by the Shanghai Futures Exchange more than doubled this year to 409,137 tons, the highest since June 2013. Global inventories, both monitored and unmonitored, will reach a record 15.8 million tons by the end of 2014, compared with 13.8 million tons last year, Wood Mackenzie estimates.

Unavailable Metal

Prices may get a boost from rising demand as the surplus narrows. Aluminum may average $1,855 in the fourth quarter, up 3.1 percent from now, according to the Bloomberg survey.

Global demand will grow about 7 percent this year and in 2015, according to Citigroup Inc. The future growth rates should “easily outstrip those of other base metals,” Robin Bhar, an analyst at Societe Generale SA, said in a March report.

More than 280 billion beverage cans are made worldwide each year, with more than 85 percent of them made from aluminum, according to Novelis Inc., whose customers include Coca Cola Inc. A 330-milliliter (11-ounce) can weighs about 13 grams (0.03 pound), according to the International Aluminium Institute in London.

Sales of auto sheets by New York-based Alcoa will rise to $1.3 billion in 2018 from $330 million this year, mostly driven by increased use in lighter-weight vehicles including Ford Motor Co.’s F-150 pickup truck, Klaus Kleinfeld, chief executive officer, said in an April 8 conference call.

Auto Sales

Transportation accounts for 20 percent of use, according to Bank of America Merrill Lynch. Global sales of cars and light commercial vehicles will rise 5 percent this year to a record 88.4 million vehicles, researcher LMC Automotive Ltd. estimates.

With production cuts that include Alcoa and Rusal, the surplus expected in the Bloomberg survey would be the smallest since 2006, while Barclays Plc and Bank of America are predicting an output deficit.

Delivery delays at some warehouses monitored by the LME exceed two years, exchange data show. As much as 80 percent of aluminum in LME stockpiles may be tied to financing arrangements, Paris-based Societe Generale estimated in January.

Still, China keeps expanding. Capacity for rolled products grew 19 percent last year and probably will increase at least 10 percent annually in the next few years, said Yuya Pan, a CRU consultant in London. The market for these products is oversupplied in China, she said.

“We don’t have the deficit right now,” said David Wilson, an analyst at Citigroup in London, who has followed the market for two decades. “It doesn’t matter that the western world is in deficit if aluminum demand is being met by just a different stage in the production process from China.”

To contact the reporter on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

Chinese aluminium prices poised to outperform LME futures

Aluminium futures in Shanghai may perform better than their London counterparts in the next few months as the outlook brightens for what has been one of China's most chronically oversupplied commodities.

Shanghai futures lost 6.4 percent in yuan terms and 15.3 percent in U.S. dollar terms from the start of the year to the close on Wednesday.

In contrast, the benchmark London Metals Exchange contract has been steady, rising 0.5 percent from the start of 2014 to Wednesday's close.

The Shanghai Futures Exchange contract has also been in a sustained downtrend so far this year, while the London equivalent has had periods of strength, being up 5.1 percent at its closing peak on April 10.

In dollar terms, the premium of futures in Shanghai narrowed to $298.18 a tonne over London on Wednesday, down from $515.94 at the start of the year.

The premium has narrowed in recent weeks to levels not seen for more than a year, suggesting that a widening is likely in months to come.

There are several factors supporting the view that Chinese aluminium futures will outperform those in London over the medium term.

The first is that the narrowing of the premium has made it more likely that China, the world's top producer of aluminium, will import more of the industrial metal as traders take advantage of the lower international price.

At current Shanghai prices, it's still profitable to import the metal, even accounting for duty, the 17 percent value-added tax, shipping and insurance.

China's imports of aluminium have been rising this year, gaining 239 percent in the first quarter to 153,291 tonnes, according to customs data. 

While this is still a small amount relative to China's overall output of the metal, it shows that appetite for imports is up strongly.

China produced 5.8 million tonnes of aluminium in the first quarter, up 9.9 percent on the same period last year, according to the National Bureau of Statistics.

INPUT COSTS RISING

Another reason to start becoming bullish on Chinese aluminium prices is rising input costs.

The cost of China's imports of bauxite, the raw ore that is made into alumina, which in turn is processed into aluminium, has been climbing in the wake of the ban on the export of the raw ore imposed in January by Indonesia, formerly the world's largest bauxite exporter.

China's bauxite imports dropped 5.4 percent in the first quarter from the same period in 2013.

But more importantly, the price has been rising, with the average price in March being $59.49 a tonne, up 16 percent from the same month in 2013.

The situation is likely to worsen for while China has been able to find alternative suppliers for much of its bauxite needs, these have been considerably more expensive.

Brazil supplied 174,846 tonnes of bauxite in March, or about 9.5 percent of China's imports for the month, but the cost was $76.60 a tonne, well above the $52.98 for cargoes from Indonesia.

The Dominican Republic is also a new supplier, with 193,720 tonnes arriving in March for a 10.6 percent share, but at a cost of $61 a tonne.

While China built up stockpiles of bauxite in anticipation of the Indonesian ban, these will be largely run down within a year, meaning that the higher costs of the alternative supplies will start to feed through to the cost of production.

China's oversupply of aluminium may also start to ease slightly with the closure of 420,000 tonnes of outdated capacity this year as Beijing's campaign to reduce pollution gathers some steam.

While this is still a small fraction of China's total annual output of about 25 million tonnes, it's likely that more closures will be announced for next year as reducing pollution shows every sign of remaining a top government priority.

China's aluminium surplus may also reduce in the medium term through rising exports of fabricated aluminium products for use in items such as beverage cans and foil for packaging.

Technical indicators are also supportive for price gains for Shanghai aluminium futures, with the curve <0#SAF:> moving to contango from backwardation in the past few months.

The six-month future is currently at a premium of 2 percent to the front-month, while six months ago it was at a discount of 1 percent.

There are of course headwinds for China's aluminium sector as well, including slower than anticipated industrial growth and the ongoing subsidisation of loss-making producers by local authorities more concerned about jobs than profits.

But overall, these may be outweighed by the increasing positive factors that support Shanghai prices outperforming those in London

Aluminum Sector to Lead M&A in Chinese Nonferrous Metals Industry

The Chinese aluminum sector will take a leading position in mergers and acquisitions in domestic nonferrous metals industry in the future, Securities Daily reported today. 

From January to 13 May, 22 M&A deals, valued at 23.35 billion yuan ($3.8 billion), were made in domestic non-ferrous metals industry, the report quoted data from Zero2IPO Group as saying.

 

China’s State Council’s new nine measures, a guideline detailing an array of capital market reforms, and problems facing the industry are reasons behind such an expectation, it said. 

 

The Chinese aluminum industry, featured by high pollution, high energy consumption, overcapacity and loss-making, was added to the list of inefficient capacity elimination released last year by the Ministry of Industry and Information Technology. This will promote the process of mergers and acquisitions in the industry, the report said.

Shale Boom Sends U.S. Crude Output to 28-Year High

U.S. crude production climbed to a 28-year high last week as the shale boom moved the world’s biggest oil-consuming country closer to energy independence.

Output rose 78,000 barrels a day to 8.428 million, the most since October 1986, according to Energy Information Administration data. The combination of horizontal drilling and hydraulic fracturing, or fracking, has unlocked supplies from shale formations in the central U.S., including the Bakken in North Dakota and the Eagle Ford in Texas.

“This is an incredible phenomena that looks set to continue,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “There’s a long way to go before we explore and exploit all of the shale deposits out there.”

The U.S. met 87 percent of its energy needs in 2013, and 90 percent in December, the most since March 1985, according to the EIA, the statistical arm of the Energy Department.

Crude output will average 8.46 million barrels a day this year and 9.24 million in 2015, up from 7.45 million last year, the EIA said in its monthly Short-Term Energy Outlook on May 6. Next year’s projection would be the highest annual average since 1972.

The EIA forecasts that the gain in production at shale fields will be augmented by greater offshore output this year and next. Crude output in the waters of the Gulf of Mexico will climb by 150,000 barrels a day in 2014 and by an additional 240,000 barrels in 2015, following four consecutive years of declines, according to the May 6 report.

Export Ban

U.S. Energy Secretary Ernest Moniz said yesterday that the mismatch between rising production of light oil in the U.S. and the country’s refining ability is driving the debate over whether to lift a ban on crude exports. The crude unlocked from shale deposits is too low in density to be absorbed entirely by the U.S. refining system, Moniz told reporters in Seoul.

“The driver, or the consideration, is that the nature of oil we are producing may not be well matched to our current refinery capacity,” Moniz said.

The remarks highlighted pressure to overturn 1975 legislation that bars exports while U.S. production rises and inventories swell. Senator Lisa Murkowski of Alaska, the senior Republican on the Energy and Natural Resources Committee, said in a Jan. 7 speech that she supports changing the export rules.

“This increases the pressure on the U.S. to finally allow for the export of crude,” Kilduff said. “The U.S. could be a major player in global export market.”

Stockpile Gains

Production gains helped send U.S. inventories to 399.4 million barrels in the week ended April 25, the most since the EIA began reporting weekly data in 1982. Stockpiles increased 947,000 barrels to 398.5 million barrels in the week ended May 9, according to the agency.

Inventories along the Gulf Coast, known as PADD 3, grew 2.33 million barrels last week to 215.7 million, the most in EIA data going back to 1990. Supplies there have been growing since January as the southern leg of the Keystone XL pipeline began moving oil to Gulf Coast refineries from Cushing, Oklahoma, the largest U.S. storage hub.

Futures rose after today’s EIA report showed supplies at Cushing, the delivery point for WTI, dropped for the 14th time in 15 weeks. Inventories fell 592,000 barrels last week to 23.4 million, the lowest level since Dec. 5, 2008.

West Texas Intermediate crude for June delivery increased 67 cents, or 0.7 percent, to settle at $102.37 a barrel today on the New York Mercantile Exchange. It was the highest closing price since April 21.

Gold Prediction using Statistics and Technical Analysis

Here is my gold prediction (silver and gold mining stocks, should be the same) looking forward 24 months.

Since the top in gold in 2011 gold has selling off. Depending on how you analyze the market, this 3 year sell off could be seen as consolidation within a major cyclical bull market or that it's in a bear market. But know this, either way, the outlook is bullish, and all gold has to do is find a bottom here and rally above the $1400 per ounce level. This would kick start a major feeding frenzy of gold buying.

Gold bear market in the past have on average corrected 33% and lasted a total of 550 days. So if we look at the stats of the current pullback in gold it has dropped 38% and about 700 days long. Time for a bottom and bull market? It sure seems like it.

You can see my recent report on the US Dollar and gold forecast

Gold Prediction Technical Outlook:

Gold remains in a down trend, but looks to be starting a possible stage 1 basing pattern. Technical analysis is pointing to strength as the MACD moving higher, relative strength, and the down trendline show price and momentum being bullish.

A few weeks ago the chart completed a Golden Cross. This is not shown on the chart, but it is when the 50 SMA crosses above the 200 SMA. Investors tend to look at this as a major long term buy signal, although I do not use it for any of my analysis or timing of the market.

If historical data, statistics, and technical analysis prove to be correct we can expect gold to rise. My gold prediction is for price to reach $2300 - $2500 per ounce within 24 months.

Gold Prediction Conclusion:

The average gold bull market last roughly 450 days and posts a gain of 95%. So with the current correction which is beyond these levels already, expect price to firm up this year and complete the stage 1 base.

Note that until gold breaks out of its Stage 1 Basing pattern, I will remain bearish/neutral on the metal. There are huge opportunities elsewhere unfolding.

Targeting $1,400-plus gold in 2014 - Curran

The Gold Report: What has surprised you most in the gold market in 2014?

Michael Curran: We're a little surprised that the gold price hasn't had at least short-term runs to higher levels. We've had continuing global financial challenges and we've had growing political risk in places like Ukraine. Historically, those things have sent the gold price higher.

TGR: What's gold's role in an improving global economy?

MC: We definitely believe that gold is a play against improving global economics. If we see strong moves toward improving global economics, then we expect gold's role to be diminished. We still view gold as a store of value. When interest rates are low there is a case to own bullion and/or equities because they tend to be negatively correlated with strong economies.

TGR: From where will the bid emerge?

MC: Possibly aftershocks to the system that would suggest that the global economy is deteriorating. That's when we tend to see the best performance in gold and gold equities.

TGR: Traditionally summer is soft for the gold market. How do you see gold prices unfolding this summer season?

MC: We definitely believe in the "summer doldrums" for gold, when the metal tends to lose some physical demand support. Jewelry manufacturers don't need to buy physical gold until the latter part of the summer for all those events around the end of the year, like Indian wedding season, Christmas and Chinese New Year. Unless there is some other market catalyst, we tend to see gold pretty flat over the summer months.

TGR: It's difficult for investors to watch their portfolios slide lower on seasonal weakness. How should they cope with market softness?

MC: Our general view is that gold equities should be traded. We've never really been proponents of long-term holds on gold stocks. Historically, equities haven't been great long-term holds because of the way gold vacillates between "in favor" and "out of favor." A lot of the larger producers have already given back 20–25% in the last couple of months so it hasn't been a case of "sell in May and go away"; it's been "sell in March and go away."

A lot of the producers are in the middle of their 52-week price ranges. I wouldn't sell those stocks now; you might as well hold them. Some of those stocks will be pretty attractive opportunities in the next couple of months if they give back another 10% or 15%.

TGR: Generally speaking, what is an ideal percentage of gold exposure in an investment portfolio?

MC: Most portfolios would benefit from some gold exposure, but we're not zealots insisting people need to have 50%, 75% or 100% of their portfolios in gold or gold equities. I think somewhere between 5% and 10% is a good place for most people. Investors at the upper end probably want a mix of equities and bullion. At the lower end investors can probably get by with just buying equities.

TGR: What is your current investment thesis for small-cap gold equities or are there multiple theses?

MC: We prefer the small caps to larger caps at this point and we are taking a three-pronged approach. Our primary focus is high-grade projects in low political-risk jurisdictions. On the low-grade side, we focus on potential heap-leach projects as those projects tend to have low capital expenses and low operating costs. And we still see some opportunities in the early-stage drill plays where there is a little more risk but probably good returns if these companies are successful in their drill programs. For the most part, we would focus on explorers seeking high-grade gold.

TGR: Do you believe gold will finish 2014 above $1,400/oz?

MC: I think we can finish the year somewhere in the $1,400–1,500/oz range. We're seeing a flat summer and then there will be some catalysts later in the year to push gold higher. Our current target would be $1,400/oz plus.

TGR: What would those catalysts be?

MC: They are going to be things related to either political risk or that economies aren't improving as much as people believed, or if there's a hiccup with quantitative easing in the U.S.

TGR: Michael, thank you for your time.

Michael Curran is a managing director and mining analyst with Beacon Securities in Toronto. He was previously a director and a mining research analyst with RBC Capital Markets. Curran received the #1 Ranking for Mining & Metals research coverage by The Wall Street Journal (Annual Best on the Street Survey) in May 2013.

Nickel Drops Most Since Mid-2012 on Adequate Supply

Nickel posted the biggest drop since December 2011 as some investors deemed a surge to a two-year high to be excessive amid signs of sufficient supply.

Nickel inventories tracked by the London Metal Exchange have risen 6.6 percent since December, even as a ban on unprocessed-ore exports by Indonesia, the biggest supplier of the mined metal, helped drive prices up 44 percent this year. Nickel’s 14-day relative strength index rose to 91 yesterday, the highest since 2004. Readings above 70 signal to some investors that prices may decline.

“Some of the speculators may have gotten a little too long” in betting on further price gains, Bart Melek, the head of commodity strategy at TD Securities in Toronto, said in a telephone interview. “There’s still a lot of material out there. There’s quite a bit of inventory.”

Nickel for delivery in three months dropped 4.6 percent to settle at $20,030 a metric ton at 5:51 p.m. on the London Metal Exchange, the biggest decline since Dec. 14, 2011. Prices touched $21,625 yesterday, the highest in 27 months.

Prices may pull back toward the end of May and the beginning of June before rebounding later in the year, Citigroup Inc. said May 9. Goldman Sachs Group Inc. raised its six-month price target to $22,000 from $20,000 after prices rose “more quickly than in our base case,” analysts including Jeffrey Currie wrote in a report dated yesterday.

Copper for delivery in three months advanced 1.1 percent to $6,920 a ton ($3.14 a pound) on the LME. Zinc, tin, lead and aluminum also advanced in London.

In New York, copper futures for July delivery advanced 0.8 percent to $3.16 a pound on the Comex, the highest close since March 6.