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Aluminum Glut No Bar to Gains as Barclays Says Sell: Commodities

Aluminum stockpiles in warehouses have surged. Photographer: SeongJoon Cho/Bloomberg

The record glut in aluminum will be no bar to rising prices because of delays in getting metal from warehouses, even as Barclays Plc advises investors to sell and Morgan Stanley says it has the worst outlook of any commodity.

Stockpiles will expand for at least the next four quarters, reaching a record 8.67 million metric tons by the end of 2013, or enough to make about 62 million cars, Barclays estimates. Production will exceed demand by the most since 2009 as output expands from China to Saudi Arabia, the bank says. Futures will rise as much as 16 percent to $2,400 a ton next year, the median of 29 analyst estimates compiled by Bloomberg.

The gains are forecast as the metal is not always available. Buyers are waiting about a year to get metal from warehouses in Detroit and the Dutch port of Vlissingen, which hold the most inventories. As much as 80 percent of stockpiles tracked by the London Metal Exchange are locked into financing deals and unavailable to consumers, Credit Suisse Group AG estimates. That means some customers are paying record premiums to get supply, according to Platts, a unit of McGraw-Hill Cos.

“You have what I would call an artificial tightness in the market and that’s created by financing,” said Jeremy Baker, who manages about $850 million of assets at the Vontobel Belvista Commodity Fund in Zurich. “If you look at it from a purely fundamental aspect it is probably one of the metals that is the least attractive, primarily due to excessive supply.”

Asset Rankings

Aluminum rose 2.7 percent to $2,075 on the LME this year. Prices will average $2,225 in the final three months of 2013, or 10 percent more than this quarter, the median of 19 estimates shows. The Standard & Poor’s GSCI gauge of 24 commodities climbed 0.2 percent, and the MSCI All-Country World Index of equities gained 13 percent. Treasuries returned 1.98 percent, a Bank of America Corp. index shows.

Inventories tracked by the LME rose 5.3 percent to 5.23 million tons this year, reaching a record Dec. 21, bourse data show. Premiums paid for immediate supply in the U.S. Midwest rose 45 percent this year, while in Europe they increased about 80 percent, Platts data show. Buyers have to wait as long as 64 weeks to get metal from warehouses in Detroit and 57 weeks in Vlissingen, according to data compiled by Bloomberg. The wait times at the locations lengthened as total bookings jumped the most in more than 10 months to 1.95 million tons, the highest on record, LME data on Dec. 24 showed.

Financing Deals

About 50 percent of global inventories, including those monitored by the LME, may be tied up in financing deals, Credit Suisse estimates. The transactions typically involve a simultaneous purchase of metal for nearby delivery and a forward sale to take advantage of a market in contango, when contracts with later delivery months cost more than nearer-dated metal.

Global production will jump 7.4 percent to 51.4 million tons next year, compared with a 3.4 percent gain in 2012, Barclays estimates. While consumption will advance 6.3 percent, the most of any industrial metal tracked by the bank, the gap with supply will widen to 1.66 million tons. Investors should sell into any rallies, Barclays’ analysts led by London-based Gayle Berry wrote in a report Dec. 14.

“Demand growth for aluminum has been stronger than any other base metal over the past decade, but it’s done not a lot for prices because supply has grown so strongly,” Berry said. “That’s going to be the picture for next year.”

Weakest Outlook

Aluminum has the weakest outlook of 21 commodities tracked by Morgan Stanley, the bank said in a Dec. 6 report. The increase in premiums caused by financing deals is keeping most smelters profitable and limiting the output cuts needed to curb the glut, according to the bank’s analysts, led by Hussein Allidina in New York.. About 1.4 million tons of production capacity was shut over the past year, not enough to prevent a sixth consecutive annual surplus, Morgan Stanley estimates.

The European Commission, the executive arm of the 27-nation European Union, said last month it was discussing the premiums being paid by consumers and lines at warehouses. The LME changed its rules this year to speed up deliveries, and that may lower premiums, diminishing returns for producers.

Moody’s Investors Service Inc. said Dec. 18 it may cut the credit rating of Alcoa Inc., the largest U.S. producer, to junk. Equity analysts are more bullish, predicting a 23 percent advance in the New York-based company’s shares to $10.56 in 12 months, according to the average of 18 predictions. Alcoa’s profit will rise to $722.4 million in 2013, from $77.7 million this year, the mean of 10 estimates shows.

Rusal’s Profit

United Co. Rusal, the world’s largest producer, will report an almost threefold gain in profit to $957.4 million next year, according to the mean of 14 estimates. Shares of the Moscow-based company will advance 11 percent to HK$5.46 in 12 months, according to the average of 18 predictions. Rusal’s costs per ton are $1,936, it said in a presentation Nov. 12.

Some smelters’ margins are being squeezed by rising energy prices, which Bloomberg Industries estimates account for about 26 percent of production costs. Brent, Europe’s benchmark crude oil grade, averaged a record $111.67 a barrel this year and natural-gas futures jumped 12 percent in New York.

Producers using coal-fired power generation may do better after prices for the fuel dropped 24 percent this year in the north-east Chinese port of Qinhuangdao, according todata from IHS McCloskey. About 85 percent of Chinese production uses power derived from coal, according to Wood Mackenzie Ltd., and the nation accounts for 45 percent of global output.

Car Sales

Stronger demand may help ease the glut. Transportation accounts for 25 percent of consumption and construction 24 percent, according to CRU, a London-based researcher. Global car sales will rise 2.5 percent to a record 82.77 million units next year, says LMC Automotive Ltd., a researcher in Oxford, England. An average car has about 140 kilograms (309 pounds) of aluminum, according to the European Aluminum Association.

The International Monetary Fund expects global growth to advance to 3.6 percent in 2013, from 3.3 percent this year. The economy of the 17-nation euro area will expand again from the third quarter, based on the median of 30 economist estimates. China, the biggest aluminum consumer, will keep accelerating for at least the next two quarters, according to the forecasts.

“The market balances generally don’t matter,” said Michael Widmer, a London-based analyst at Bank of America. “What matters is what is happening on the LME. You just have to pay up for getting hold of the metal.”

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