Aluminum orders remain flat

The latest statistics from the U.S. Aluminum Association show that the total net new order index for domestic aluminum mill products was flat in October at 83.91, compared with 83.63 in the previous month and 82.48 in October 2001. The total index, less can stock, rose to 83.45 in October 2002, representing a rise of 6.9% month over month and 4.1% year over year. The order index leads shipments by about three months.

While the data series tend to be volatile, the 3-month moving averages for both indices are still pointing downwards, and we think it is too early to say that improvements in the index, excluding can stock, represent a turning point, especially given overall economic weakness.

As future supplies are ample, with operating rates rising rapidly, not only in China but also in Russia and the Western World, demand improvements will be key to preventing a significant price fall. So far, U.S. order data, together with demand data in other regions, have failed to impress. In addition, the latest economic indicators in Germany suggest that the economy is moving into recession.

However, two demand-side factors could help aluminum maintain a relatively favourable position despite large supply overhangs.

First, geographical distribution of aluminum demand is more exposed to the North American market (27% of the total) than any of the other base metals. This (together with strong growth in Chinese demand) could allow a demand recovery to occur earlier for aluminum than for the other base metals.

Secondly, aluminum’s large exposure to the packaging sector (27% of the total) has had a dampening effect on demand pressure. The packaging sector has enjoyed relatively better growth rates despite sharp reductions in other end-use sectors over the past year.

Another interesting feature of the aluminum market in recent weeks has been the tightening of the forward curve. Such sharp tightening of spreads at times of good metal availability and weak demand is largely unprecedented. We believe the borrowing activity could be related to a producer with idled capacity or a merchant with an inventory shortfall striving to meet customer obligations.

To sum up, we believe the recent rally, supported by forward tightness and technically driven speculative activity, has been overdone in an environment of weak demand. As a result, another test of the US$1,300-per-tonne level in the short-to-medium term is likely, while further significant price falls could be avoided by the aluminum market’s relatively favourable demand exposure.

— The opinions presented are the author’s and do not necessarily represent those of the Barclays group. For access to all of Barclays’ economic, foreign-exchange and fixed-income research, go to the web site at barclayscapital.com. Queries may be submitted to the author at kevin.norrish@barcap.com