Aluminium inventories on the London Metal Exchange (LME) have reached 15-year highs due to constant falling demand from automobile and construction sectors — major contributors to the metal’s demand worldwide.
The current inventory pile-up, according to data from Bloomberg, is at 2.44 million tonnes, a level last seen in 1993-94. The inventory position has actually changed dramatically since September 2008 as they have risen by 108 per cent in the past four months.
Amar Ambani, vice-president (research), India Infoline, says, “The inventory could remain at these levels and may not change for some time now. Demand reduction could continue as the global economy sees no signs of revival. This would lead to inventory losses and could further see a drop in the prices of the metal. Both auto and construction sectors cater to the aluminium demand and a drop in these sectors worldwide is evident and the effect on the commodity prices is quite visible.”
National Aluminium Company (Nalco), a leading aluminium player in India, stated that the firm’s inventory has increased over 100 per cent in the last nine months of the current financial year. The company carried a closing inventory of 5,000 tonnes of aluminium at the end of 2007-08.
“Normally, we carry an inventory of 5,000-8,000 tonnes of aluminium. But now it has gone up to something between 10,000 and 15,000 tonnes,” said C R Pradhan, chairman and managing director of Nalco. Considering the present glut in the market, he anticipated the inventory to reach as high as 30,000 tonnes by the year-end.
“We are a small player in the international market. There is no problem in selling a few thousand tonnes more though the sale price may remain low. If the prices come off further, we are prepared to stockpile the material and sell it at a later date when it can fetch a better price,” Pradhan added.
He cited the example of China, where the government has decided to build-up an inventory of 3.5 lakh tonnes of aluminium with the objective of selling it at a better price later. The LME price for the metal is $1,483 a tonne and analysts believe that it could come down further.
Internationally, such an inventory rise has resulted in a supply-side response. According to brokerage house CLSA, the aluminium sector has witnessed production cut announcements of around 4 million tonnes in the past few months. Some of the smaller smelters have actually had to shut shop citing lack of demand as the reason.
Industry majors such as Brazil’s Vale and Chinese Chalco have cut back on production by about 57,000 and 7,20,000 tonnes, respectively. The CLSA report further states that though the alumina prices and energy costs have resulted in the aluminium cost curve moving down in recent months, improvement in prices is unlikely as there has been a drastic decline in demand.
“Production has already been cut and capacity expansion plans will be delayed or scrapped. If prices fall further, we might face deflationary trends in the aluminium business. The trigger to see for in terms of improvement in the business will be based on how quickly the economy revives and the stimulus packages announced by countries are implemented,” said Ambani.
However, Nalco has recently gone on to operationalise a new pot-line which will increase its aluminium output. But the company is facing some problems even on the domestic front. “The offtake of the metal by the dealers has been slow as they are expecting a further reduction in prices. ,” Pradhan said.
(With inputs from Dillip Satapathy)
