Power woes could create aluminum ingot shortage

By Staff -- Purchasing, 9/7/2000

Electricity supply problems will cause smelters in the Pacific Northwest to reduce primary aluminum production and create a global deficit of ingot, suggests minerals strategist Ted Arnold of Prudential-Bache International in London.

Bonneville Power Administration supplies electricity to almost half the Pacific Northwest. BPA had several unexpected plant outages this year that forced the federal agency to reduce supply to industrial customers and to stop selling to customers outside the region. This already has triggered an audited cutback in aluminum smelting by 7% in North America (U.S., Canada and Mexico) to 492,000 tonnes in June from 528,000 tonnes in May, according to data from the International Primary Aluminium Institute (ipai). Actual U.S. aluminum output in July totaled 296,338 tonnes, the Aluminum Association says. So, the annual rate of U.S. primary aluminum production totaled 3,498,700 tonnes in July, down from 3,645,287 in June of this year, and from 3,761,207 in July 1999.

Arnold expects the cutbacks to continue this year and for aluminum producers in the Pacific Northwest to produce at half their capacity next year because the BPA will provide only 50% of power supplied to these smelters at subsidized rates when it renews long-term contracts in mid-2001.

"In 1999, the BPA area produced 1.4 million tonnes of aluminum and in 2000, the BPA area looks like it will produce around 1.37 million tonnes," says Arnold. "In 2001, the BPA area will produce around 800,000 tonnes of aluminum."

And this will trigger a global supply deficit, he says. "This year, with a world consumption growth rate of 5%, look for the global market to be balanced, or run a small supply deficit of 25,000 tonnes," Arnold says. "In 2001, this supply deficit will grow to just over 500,000 tonnes on the assumption of a consumption growth rate of 2.6%." Looking at a 3% demand growth rate in 2002 and some pickup in Western U.S. smelting, he suggests the global deficit will be around 450,000 tonnes.

However, production isn't the only factor that affects price. Note that in June, when world production was 1.729 million tonnes, London Metal Exchange (LME) cash aluminum was 68¢/lb. By comparison, in June 1999, when smelting totaled 1.689 tonnes, the LME cash price was 60¢/lb. Stocks also play a big role in prices. "At the end of 2000, we're looking at overall stock levels equivalent to around 70 days of supply," he says. At the end of 2001, the stockpile will fall to around 60 days of supply and, at the end of 2002, stocks would fall to around 50 days of supply.

Arnold points out that the last time world stock levels in aluminum fell to 60 days was in 1997, when LME cash aluminum prices averaged 83¢/lb. "So, a trading range next year for three-month LME aluminum of between 82.5¢/lb and 87.5¢/lb could be very easily justified on the basis of fundamentals and stocks-to-consumption ratios," Arnold says.

According to the ipai, aluminum producer wrought and unwrought inventories fell 2.4% or 76,000 tonnes month to month in June. Producer inventories fell in almost all regions, with the exception of Asia, which posted a 4% (10,000 tonnes) gain. Year to year, the drop in producer inventories was slight, down 0.5% or 14,000 tonnes, as inventory declines in North America, Europe and Oceania were offset by increases in Asia, Latin America and Africa. Year to date, producer inventories are down 3.7%, largely due to reduced inventories in North America and Europe. As calculated by Credit Suisse First Boston in New York, producer unwrought inventories fell to its lowest level since August 1990. At the end of June, number of weeks' supply was at 5.5, with 2.239 million tonnes of metal in reported Western stocks. Stocks of metal held on the LME, the New York Commodity Exchange, and the total reported by ipai producers were down 148,650 tonnes from May and down 382,815 tonnes year to date. "With continued strength in the global economy, the aluminum system inventory reduction will continue," says csfb analyst Tom Van Leeuwen.

Ingot prices "could go ballistic" in 2001 from a year-to-date 2000 average of 71¢in anticipation of a "horrendously tight supply situation," cautions analyst Arnold at Prudential-Bache. Reason: The last time global stocks were down to around 50 days was in 1989 when the cash LME price averaged just under $1.20/lb.