Heads-Up, Aluminum: Reading the Key January Indicators

(Continued from Prior Part)

Previously in this series, we talked about aluminum has been moving away from official LME (London Metals Exchange) warehouses to non-LME registered warehouses. We don’t have official data on how much aluminum is currently stored in such non-LME locations, but we do have estimates that put the unofficial stocks at a much higher level than the official LME aluminum inventories. According to Reuters (citing CRU), global aluminum inventory including unofficial stocks stands at around 15 million metric tons.

Alcoa (AA) expects global aluminum demand at 60.5 million metric tons in 2016. The current aluminum inventory represents more than 90 days of global demand. However, in its 4Q15 earnings call, Alcoa said that it estimates that global aluminum inventory comes in at about 60 days. The chart above shows Alcoa’s estimates of global aluminum inventory. Notably, Norsk Hydro (NHYDY) has a higher estimate of global aluminum inventory. In its 3Q15 earnings call, Norsk Hydro estimated global inventory at approximately 95 days.

Most of the aluminum inventory in the world is expected to be tied in aluminum financing deals. The unwinding of financing deals could push more aluminum into the markets, putting further pressure on already weak aluminum prices. Furthermore, according to Reuters (citing Antaike), six Chinese aluminum producers including Aluminum Corporation of China (ACH) are forming a joint venture to stockpile aluminum. This would lead to further inventory buildup in the markets.

We should note here that more inventory buildup like this is comparable to a ticking time bomb. Aluminum stockpiling would help keep Chinese aluminum smelters run more plants and produce more aluminum. However, in the end, aluminum will still eventually enter the supply chain, and prices would tank.

The huge aluminum inventory buildup supports the “lower for longer” sentiment in aluminum prices. There are several other factors that will likely weigh heavy on aluminum prices in 2016. More more, check out our series Alcoa’s 2016 Outlook: What’s Driving the Recent Downfall?

Meanwhile, you might also consider the Materials Select Sector SPDR ETF (XLB) for diversified exposure to the materials sector. Together, Alcoa and Ball Corporation (BLL) make up about 4.5% of XLB’s total portfolio.

For further analysis, check out Market Realist’s Aluminum page.

Browse this series on Market Realist:

• Part 1 - Alcoa Escapes 52-Week Lows, But Is It out of the Woods?
• Part 2 - Aluminum Prices Sag Below $1,500 Level amid Global Turmoil
• Part 3 - Aluminum Premiums Strengthen in US, Fall in Europe