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“We remain extremely skeptical, however, that current price levels are sustainable on a fundamental basis. Faced with the prospect of the largest market surplus since 2009 and a 9.3 week stock-to-consumption rat..

17 Jan 2013

LONDON (Commodity Online): Barclays remains extremely scpetical of the level of sustainability in prices for Aluminum, the London based bank said in a report. The bank expects pressure to return to markets over the short term.

“We remain extremely skeptical, however, that current price levels are sustainable on a fundamental basis. Faced with the prospect of the largest market surplus since 2009 and a 9.3 week stock-to-consumption ratio, pressure will return, and we forecast LME cash prices to average $1,900/t in Q1 13.” Barclays said in a report.

Aluminium prices have remained largely range bound close to the $2,100/t level over the past month. Some support has come at a macro level from the US fiscal cliff resolution, alongside some optimism on the Chinese growth outlook.

Front-end spreads back into contango

Flat price action aside, LME time spreads have also attracted attention over the past month. Front-end spreads have swung back into contango after the brief but sizeable backwardation in December. Similar episodes are likely to continue to occur, given occasional extremes in positioning and warrant holdings
regarding LME delivery dates.

Longer-dated spreads have not bounced back in the same fashion, with key financing benchmarks such as the cash-to-15 month trading at levels that depresses the profitability of such transactions.

Barclays believes aggressive producer selling on recent LME rallies is a key factor. Even so, financing continues, and combined with a record level of LME cancelled warrants (and queues), premia remain well supported, with the US Midwest at a new record level this month.

China factor

As for our 2013 fundamental projection, the critical component of a near 1.8Mt surplus is that Chinese production growth will increase to close to 12%, versus 10% this year. We remain confident that power tariff cuts made in mid-2012 in several provinces will remain in place this year, supporting stable production in central/eastern provinces.

Where higher risks lie are in terms of how bottlenecks are overcome for capacity expansions in Xinjiang province, particularly in terms of transport/freight routes.

“Given that we expect close to 1.5Mt output growth from the province, evidence of easing in such hurdles will be an important factor in reaching this level.” the Bank concluded in a report.


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