• 4 minutes Europeans and Americans are beginning to see the results of depending on renewables.
  • 7 minutes Is China Rising or Falling? Has it Enraged the World and Lost its Way? How is their Economy Doing?
  • 13 minutes NordStream2
  • 14 hours Monday 9/13 - "High Natural Gas Prices Today Will Send U.S. Production Soaring Next Year" by Irina Slav
  • 5 hours GREEN NEW DEAL = BLIZZARD OF LIES
  • 8 hours California to ban gasoline for lawn mowers, chain saws, leaf blowers, off road equipment, etc.
  • 19 hours "Here is The Hidden $150 Trillion Agenda Behind The "Crusade" Against Climate Change" - Zero Hedge re: Bank of America REPORT
  • 8 hours Did China cherry-pick the factors that affected the economic slow-down?
  • 5 days "A Very Predictable Global Energy Crisis" by Irina Slav --- MUST READ
  • 2 days U.S. : Employers Can Buy Retirement Security for $2.64 an Hour
  • 3 days Nord Stream - US/German consultations
  • 409 days Class Act: Bet You've Never Seen A President Do This.
  • 5 days An Indian Opinion on What is Going on in China
  • 2 days Forecasts for Natural Gas
  • 2 days Australia sues Neoen for lack of power from its Tesla battery
  • 5 days Storage of gas cylinders
  • 5 days Can Technology Keep Coal Plants Alive and Well?
Stuart Burns

Stuart Burns

Stuart is a writer for MetalMiner who operate the largest metals-related media site in the US according to third party ranking sites. With a preemptive…

More Info

Premium Content

Falling Oil Prices Causing Temporary Drops in Aluminum

A series of recent FT articles covering a range of topics such as global growth, commodity market volatility and aluminum demand appear to offer conflicting guidance on the direction of prices for the light metal later this year and next. Aluminum’s price correlation to oil is an issue we have raised before in recent articles. As the oil price rose, the energy-intensive nature of aluminum’s production supported the metals price even as other metals such as copper and tin fell. In the last month, the price has fallen about 10 percent on the back of a falling oil price and strengthening dollar. (See aluminum and oil’s corresponding price drops below :)

Aluminum price
30-day LME aluminum price. Source: LME

Oil Price
30-day oil price

Gregory Meyer at the FT points to this correlation and suggests the falls are temporary, as surging Asian demand reduces OPEC’s once-comfortable cushion of 5 mb/d spare capacity touted at the turn of the year as being more than enough to ensure no oil shortages were on the horizon. Although oil prices have come off in a more risk-averse, Euro-crisis-fretting investment environment, the FT holds that demand is not slowing and yet the rate of new supply growth is. Sooner rather than later, this disconnect will resolve itself in rising prices again, creating support for aluminum. Even the IMF  supports this position in its economic outlook, saying oil prices are set to spike again as they did in 2008 and worries this could damage global growth.

One impact of high oil prices is how it fuels inflation. Although it has remained benign in the US, the end is in sight in Europe, with Euro interest rates likely to play to the booming German economy’s tune rather than the near-bankrupt Greek or Portuguese need for low borrowing costs. Inflation in Asia and other emerging market areas has been a feature of H2 2010 and H1 2011, and will likely get worse before it gets better. Aluminum inventories, after declining slightly in 2010, have returned to growth, suggesting supply is still outstripping demand. Now standing at over 4.7 million tons, LME inventories are at record highs. Supporters say we have been here before and the forward curve is proving resilient enough to support the ongoing finance of these stocks by banks and traders, but in a separate FT article, Max Layton, metals analyst at Macquarie, warns that when interest rates start to rise, 3 million to 4 million tons of aluminum could be released on to the market, triggering a price collapse. The finance deals on aluminum have remained robust in a prolonged low-interest-rate environment, but how they will fare as interest rates rise is open to conjecture — if the forward curve steepens, they could persevere; if it doesn’t, the only option is liquidation as rollover finance costs prove unsustainable. Max Layton forecasts prices will trade between $2,400 and $2,800 a ton until then, presumably the balance of this year, before diving as low as $2,000 in the first half of 2012.

Of course, it isn’t as simple as just interest rates and the oil price — if only it was. Chinese production is said to have a marginal cost of around $2,200-2,300 per ton. If prices were indeed to fall, as Layton suggests, large swaths of the Chinese production landscape could close down, forcing China to become a net importer and hence supporting the price by raising non-China demand. The balance here is probably the true cost of production in China, the level of which is not clear and obviously varies from producer to producer. Some capacity is becoming constrained by power shortages in China, but the impact isn’t severe at the moment and the cost of production is not the deciding factor for current closures; it is power supply. If anyone has more detailed advice on the true cost of production in China, I am sure readers would be keen to hear of it further. The numbers could be a key part of the supply-demand balance and hence the price we can expect to be paying next year.

By. Stuart Burns

(www.agmetalminer.com) MetalMiner is the largest metals-related media site in the US according to third party ranking sites. With a preemptive global perspective on the issues, trends, strategies, and trade policies that will impact how you source and/or trade metals and related metals services, MetalMiner provides unique insight, analysis, and tools for buyers, purchasing professionals, and everyone else for whom metals and their related markets matter.


Download The Free Oilprice App Today

Back to homepage





Leave a comment

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News