*LME aluminium stocks could peak at 5 million tonnes
*More production cuts still needed
*Year-on-year demand growth long way off
By Karen Norton and Michael Taylor
LONDON, May 14 (Reuters) - Aluminium stocks in London Metal Exchange (LME) warehouses will soon reach an unprecedented 4.0 million tonnes and could even climb to 5.0 million this year before demand picks up enough to start to chip away at them.
LME stocks began their near-vertical ascent last September, almost doubling to 2.3 million tonnes by the end of 2008 and have climbed another 70 percent since then.
LME aluminium inventories "Five million tonnes is not out of the question," said Eugen
Weinberg, commodities analyst at Commerzbank in Frankfurt. By February, resurgent stocks had pushed aluminium prices to
seven-year lows below $1,300 a tonne. Some analysts and traders
predict they could surpass that and fall to $1,200 a tonne if
China, which has been stockpiling metal, turns to seller. Some analysts think stocks will peak around 4-1/2 million
tonnes but even then they do not expect big drawdowns for some
time after that unless producers make more cutbacks. "If we see production cuts of another two million tonnes, or
5 percent of additional capacity, we could see a much quicker
turn in inventories, but there's no sign of that at the moment,"
said Andrew Keen of Bernstein Research. Crumbling demand from the key car and construction sectors
due to the global financial crisis have played a big part. Others see prices dipping over the northern hemisphere
summer but rising again as consumption levels improve, albeit
from very weak levels. At 1335 GMT the LME three-months price was indicated at
$1,507/17 a tonne. Market players have become accustomed to regular, almost
daily LME stock rises. They are more concerned by the need for
producers to make extra cuts, especially as China restarts
capacity. "Four million tonnes (of LME stocks) is no more alarming
than 3 million was," said Edward Meir, senior analyst at MF
Global. "But it shows you that producers are still behind the
curve, they are still not cutting it enough." "Outside China, production cuts to date amount to 3.1
million tonnes, while in China restarts of capacity brought down
the amount of curtailed capacity to 2.5 million tonnes," said
Massimo Rossi, a senior analyst at industry consultants CRU
Group. CRU estimates that around 1 million tonnes of capacity
restarted in China in April. Stockpiling of the metal in top consumer China could also
act as a long-term drag on prices. Purchases by the China State Reserves Bureau and provisional
governments, in some cases from high-cost producers, has
prevented much-needed closures and this has put the onus on
western producers to act. But higher prices are deterring further sizeable output
curbs for now. OVERSUPPLIED Highlighting the size of the problem the market faces, Rossi
said the closely watched stocks to consumption ratio is above
100 days on a western basis. Normally 45-50 days is considered a well-supplied market. Some analysts estimate global offtake plunged by up to one
quarter in the first quarter and predict a double digit decline
for the year as a whole. Aluminium's cause has not been helped by the placement on
warrant of a huge amount of material previously tied up in deals
which no longer made financial sense. The fact that this metal became visible as demand was
slumping helped to weigh heavily on sentiment. That trend appears to have more or less run its course. Referring to the fact that LME stocks could reach 5.0
million tonnes, Weinberg said that, at current prices, they
would have a value of around $7-7.5 billion. Though a big number when compared with the past, he said it
was relatively small when considering planned infrastructure
packages and potential spending on aluminium-intensive projects. But it will be some time before the benefits are felt. A fourth quarter improvement in consumption was wishful
thinking, according to a trader. "I'm sure you'll see it better than now, but that's not
hard," he said. "We're very busy in China, but if you take that
out of the picture, we are completely under-whelmed and there's
nothing going on of any consequence." For a graphic on LME aluminium stocks click on: http://graphics.thomsonreuters.com/059/CMD_DLYALI0509.jpg For today's Metals Insider column on China's aluminium
sector, click on (Edited by Peter Blackburn)