Where are Aluminium Prices Heading?

Courtsey:According to Karen Norton from Reuters.

Analysts feel Supply problems will support the aluminium market in the near term, but high inventories will act as a brake on any attempt to move sharply higher. The LME three-months price reached a six-month high of $2,738 a tonne last week, driven up by severe winter weather in China and its worst-ever power cuts. Traders last estimated that around 1.5 million tonnes of annual aluminium smelting capacity had been shut. Producers in southern Africa cut their power usage to help ease a power shortage there. Adams of Basemetals.com feels prices could get up to $2900 in next month but can't be sustained due to high stock levels. Another consultant Angus MacMillan said the supply woes would make some difference to the market balance this year, but also thought the worsening economic outlook would counter that to some extent by having a negative impact on demand.Most analysts had been predicting a modest supply surplus this year.

(Thus the outlook could be threatened if analysts have undermined the extent of the current problems.) Stephen Briggs, economist at SG Corporate and Investment Banking thought aluminium had the least downside potential of all the LME-traded metals as recession loomed, due in part to the fact that it had made the least gains in recent years.

Some recent developments in production, stocks and prices that may influence the direction of the aluminium market in 2008 has been listed in the report.

PRODUCTION:

Jan. 31 - Rio Tinto Ltd/Plc said it reached a new power supply pact with the local utilities authority for its Kitimat aluminium smelter in British Columbia, Canada, allowing it to proceed with a 125,000 tpy expansion to 400,000 tpy.

Jan. 31 - BHP Billiton said it would cut power usage at its three aluminium smelters in southern Africa by 10 percent to help ease a power shortage. The reduction would gradually take place at the Hillside and Bayside smelters in South Africa and the Mozal operation in Mozambique and be completed in around five days.

Jan. 30 - China's worst-ever power shortage and severe winter: As of Feb. 5, traders estimated up to 1.5 million tonnes of aluminium smelting capacity was shut in order to conserve power to residences.

Jan. 30 - Rio Tinto said its planned Coega aluminium smelter in South Africa is progressing despite the country's power crisis. The project, due to produce 720,000 tpy of aluminium, will go the Rio Tinto board around mid-2008 for final approval.

Jan. 29 - Netherlands-based aluminium company Vimetco said it would focus on adding bauxite mine assets to its portfolio in a bid to become a fully integrated producer of the metal. On Feb. 5, the company said the Ministry of Mines in Guinea granted it a reconnaissance permit for the prospecting of bauxite in the Kindia Prefecture in Guinea. Vimetco also said its Tulcea alumina refinery in Romania, now closed for rehabilitation work, would probably restart in the second half of next year, subject to overall market conditions. The refinery has the capacity to produce around half a million tpy of alumina.

Jan. 25 - China's Bosai Minerals Group Co said it would invest $694 million to build a 1 million tpy alumina refinery in Guyana. Construction would start in the first half of 2009 and begin production two years later. Bosai expects its alumina production capacity in China to jump to 500,000 tpy from last year's 200,000 after a 300,000 tpy plant near Chongqing launches production by the end of 2008. Bosai expects to increase its aluminium smelting capacity to 200,000 tonnes in 2008 from last year's 130,000 tonnes.

Jan. 25 - China produced 12,283,600 tonnes of primary aluminium in 2007, up 33.8 percent from a year earlier, the National Bureau of Statistics said. Production of alumina rose by 47.7 percent over the same period to total 19,507,900 tonnes.

Jan. 25 - Power shortages could slow aluminium output growth this year to 22 percent to an estimated 15.0-15.5 million tonnes, from 12.3 million tonnes in 2007, out of a capacity of 16 million, industry officials said.

Jan. 21 - Daily average primary aluminium output in December rose to 69,700 tonnes compared with an upwardly revised 69,300 in November, provisional figures from the International Aluminium Institute (IAI) showed. In December 2006, daily average output was 66,400 tonnes.

Jan. 18 - Ormet Corp. said its Hannibal aluminium smelter in Ohio was completely up and running. At full capacity the plant produces 260,000 tpy of aluminium. The company restarted the last of its smelter's six potlines on Nov. 28.

Jan. 17 - An official of South African power utility Eskom said Alcan's Coega aluminium smelter plant could be delayed as it reviews its power supply for the project.

Jan. 11 - The annual rate of primary U.S. aluminium production surged 17.7 percent to 2,712,197 tonnes in December from 2,303,998 tonnes in December 2006, the Aluminum Association said. December's output rate was the highest since April 2003. For the year, 2007 production increased 12.2 percent to 2,559,673 tonnes from 2,280,916 tonnes a year earlier.

PRICES

Having ended 2007 just above $2,400 a tonne, aluminium prices trended higher in early January, albeit within their well-established trading range.

Worries about a recession in the United States took the whole LME complex lower later in the month, with aluminium trading down to $2,377 on Jan. 22.

But prices recovered and then shot higher at the end of last month as it emerged that Chinese smelters had been hit by power shortages and severe weather conditions. This came on top of power supply woes in South Africa.

On Feb. 1, the three-months price reached a six-month high of $2,738 a tonne and, despite easing since then, further gains have been mooted.

In January, the twice-yearly Reuters base metals price poll of 42 analysts put the 2008 median average for the LME cash aluminium price at $2,506 a tonne in 2008 and $2,540 in 2009. In 2007 the price averaged over $2,665 a tonne.

STOCKS

Total exchange stocks were 1,065,183 tonnes at the end of January, little changed from 1,046,002 tonnes. Of that total, some 956,475 tonnes were held in LME warehouses, compared with 929,450 tonnes a month earlier. Total visible stocks, including latest International Aluminium Institute (IAI) unwrought stocks (0#STOCKS-IAI) were 2,618,183 tonnes, equating to about 26 days of consumption.

Estimated aluminium stocks at the Japanese ports of Yokohama, Nagoya and Osaka totalled 198,600 tonnes in December, up 12 percent from a record low of 178,100 tonnes a month earlier, an official at Marubeni Corp said. Inventories may have risen due to the arrival during the month of delayed shipments from Venezuela, the official said. Inventories were about 15 percent below the year-earlier level of 233,900 tonnes.

Credit Suisse-Sub Prime Crisis and Commodities!!

The worst of the banking crisis resulting from the subprime meltdown is likely to be over in months rather than quarters, Credit Suisse (CSGN.VX) Chief Executive Brady Dougan was quoted as saying on Saturday.

Dougan said in an interview in the Neue Zuercher Zeitung he was an optimist and it could take three, four, five months before the crisis bottomed out.

"I believe I can already detect a certain easing of tension in liquidity and credit provision, but the big problems that set off the crisis have not yet been dealt with," he said.

"There would undoubtedly be much greater confidence if prices in the U.S. real estate market, where the crisis originated, finally stabilized. That could happen as soon as the middle of this year. But we are preparing for the possibility that the crisis continues for some time," he said.

The crisis has set off write-downs running to more than $100 billion by banks globally. Experts say final losses may reach as high as $400 billion.

Dougan forecast it would remain hard to find buyers for securitized and structured products. Buyers will only appear when the underlying assets have a market price.

At that point there would be a lot interest because of current low valuations, and there would be a prospect of considerable price rises.

"As soon as confidence returns, things will probably go up quickly again," he said.

In rare cases, Dougan expected securitized claims to be restructured, but many people holding them will be forced to wait for a better market climate, he said.

Meanwhile the mistrust between banks that has led money and credit markets to seize up was dissipating.

"Liquidity has generally improved somewhat. That's an important sign," he said. "Although markets are still far from normal, a modest recovery can be detected. The trend is now in the right direction."

Credit Suisse has suffered only limited fall-out from the subprime mortgage crisis, trimming full-year 2007 write-downs linked to the debacle to 2.0 billion Swiss francs ($1.83 billion) and pulling in billions in new investments from wealthy clients.

Its Swiss rival UBS (UBSN.VX) on the other hand has been one of the worst hit, taking $18 billion of charges in 2007 and warning of more to come that could tip it into a second year of losses.

Dougan said he expected banks damaged by the crisis to lose wealth management customers, while better positioned institutions would pick them up.

Unlike other banks, Credit Suisse is not shedding investment banking staff, but is reallocating resources.

Thus it is expanding its commodities business and involvement in emerging markets while scaling back areas hit by the crisis such as mortgage securitization, structured products and high-yield financing for takeovers and buyouts, he said. Dougan acknowledged there was a risk of a commodities bubble.

"But we think that it has great potential. Even if prices contract after the long rally, increased earnings are possible in commodities," he said.

Gold Rising: Forbes

The Allure Of Gold Is Rising

Once consigned to monetary oblivion, gold is re-emerging as an asset class. Restoration of its monetary use, though still a distant possibility, has moved a step closer to reality.

Gold for immediate delivery in London reached $929 per ounce in Asian trading on Jan. 29, an all-time nominal high. A main impetus to gold's current price ascendance is inflation fears: Gold is seen as a hedge against loss of currency purchasing power. Demand for the metal is also strong in Asia, for jewelery and as a store of value.

Despite gold's recent climb, it remains off its 1980 peak in real terms. In today's dollars, gold hit $1,766 in January 1980.

Understanding gold's monetary context is key: At that time, memories of gold's use in the international monetary system were fresh, and gold's place anchoring the system seemed natural. As economic and geopolitical difficulties beset the system, gold appeared a safer store of value.

Since then, no similar instability has driven gold prices as high. Shortly after 1980, expectations of an eventual restoration of a monetary role for gold were resolutely dashed:

--U.S. Congressional commission. Congress on Oct. 7, 1980, established the U.S. Gold Commission, whose aim was to make policy recommendations "concerning the role of gold in domestic and international monetary systems." Yet the commission's March 1982 report did not recommend restoring a monetary role for gold.

--Academic report. In the 1982 Brookings Papers on Economic Activity (Volume 1), economist Richard Cooper published a lengthy history of the gold standard and its future prospects. Cooper concluded that "both history and logic" refute the contention that stabilizing the gold price in dollar terms would stabilize the price level.

As these sentiments became policy orthodoxy, central banks rushed to offload gold holdings, putting further downward pressure on the metal.

Perceptions of transition in the international monetary system are now heightening gold's allure. Uncertainty over current world system longevity has three foundations:

1. Credit crunch. The current credit market crisis has led to a striking loosening of U.S. monetary policy, pushing yet more dollars onto an already over-supplied foreign-exchange market. Additionally, it has highlighted troubling aspects of recent innovations in the international financial system, particularly increasing systemic risk due to poorly understood synthetic securities and credit underwriting.

2. Bulging reserves. The current system undeniably is characterized partly by pegs to the center currency--the dollar. As in the 1971 death throes of the Bretton Woods system, dollar abundance is testing these pegs. Under Bretton Woods, commitments to peg demanded heroic reserve accumulation by U.S. trade partners. Inability to contain associated inflationary pressures led to the demise of pegs--and the system.

3. Center solvency. Typical concerns over the U.S. external position focus on U.S. national savings, or lack thereof. In fact, there are valid reasons for supposing that U.S. savings, and hence the strength of U.S. external accounts, are undercounted. A more pressing concern is solvency: Without reform, U.S. fiscal accounts might not be solvent on a long-term basis.

Gold's role as value store in uncertain times underpins its current high price. The shakier the international system appears, the greater the strength of gold. However, to recapture its 1980 peak, gold needs to be seen as standing a greater chance of reclaiming its historic role as a monetary asset. Yet:

--The business cycle is an unremarkable phenomenon; the greater likelihood is that the credit crunch will prove transitory, as will associated monetary easing and financial innovation worries.

--Compared to the 1970-73 cycle, today's reserve accumulation has been unspectacular. German and Japanese reserves rose nearly six-fold then, compared to less than a tripling of Chinese reserves in the 36 months to October 2007.

--More pressing is U.S. solvency: While the international monetary system cannot be based on the currency of an insolvent state, this issue has yet to permeate bond market expectations.