Aluminum Downside ‘Limited’ on Possible China Cuts: Goldman

Aluminum does not have “significant room for further downside” amid potential closures among Chinese producers as falling prices may trigger output cuts, according to Goldman Sachs Group Inc. (GS)

About 15 percent of Chinese output loses money on a cash- cost basis, and about 30 percent would be under pressure if Shanghai prices fell by 5 percent from the Dec. 2 close, Goldman said in an e-mailed report dated today. Still, overcapacity, especially in China, will cap any rally, it said, revising a 12- month forecast to $2,400 a metric ton from $2,650.

Aluminum, used in cars, packaging and houses, has fallen about 14 percent this year, the smallest drop among six base metals traded on the London Metal Exchange. The LMEX index (LMEX) has lost 18 percent this year amid concerns that Europe’s debt crisis will curb demand for industrial metals. Aluminum Corp. of China Ltd. (2600), the nation’s biggest producer of the metal, said in October that prices are close to output costs.

“Although we have not seen many price-related cuts in capacity as yet, we believe that if prices continue to trade around their present levels, in China we will see closures over the coming one to two months,” Goldman analysts Max Layton and Allison Nathan wrote in the report.

Goldman kept its three-month and six-month price targets at $2,300 and $2,400, respectively, according to the report.

Three-month delivery aluminum on the LME fell 0.9 percent to $2,111 a ton at 4:47 p.m. in Seoul after gaining 6.9 percent last week, the biggest increase since July, 2010. The February- delivery contract on the Shanghai Futures Exchange declined 0.2 percent to 16,220 yuan ($2,550) a ton.

Chinese Consumption

Goldman estimates Chinese consumption may grow 12 percent next year and ex-Chinese demand 3 percent. The bank forecast “a modest surplus” of about 800,000 tons for 2012, the report said.

“In spite of this potential surplus we see a number of bullish macro factors driving prices highs into mid-2012 including an end to de-stocking in Europe, a re-acceleration in Chinese consumption growth and stronger oil prices,” the Goldman analysts said.

Stockpiles monitored by the Shanghai Futures Exchange in the country, which accounts for about 40 percent of global output, fell 60 percent this year. Smelters in China reduced output last month to the lowest level since February because of power costs and low prices, a National Bureau of Statistics report showed on Nov. 10.

Alcoa Inc. (AA), the largest U.S. producer, has said that a “significant” part of global capacity is marginal.

To contact the reporter on this story: Sungwoo Park in Seoul at spark47@bloomberg.net.

To contact the editor responsible for this story: Richard Dobson at rdobson4@bloomberg.net

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