What’s Stashed in Warehouses Is What Spooks Hydro’s CEOby and
Financial investors sitting on sidelines with warehoused metal
Creates overhang in market struggling with overcapacity
The aluminum market is in the dark when it comes to how many tons of metal are locked up in warehouses.
Flows from stockpiles are an unknown factor in the market for the metal used in everything from beer cans to car parts. Warehouses are estimated to hold as much as 15 million metric tons, with less than three million tons in London Metal Exchange warehouses, according to Norsk Hydro ASA, Europe’s third largest producer of the metal.
”Few know how much is in the warehouses and what positions the owners have,” Chief Executive Officer Svein Richard Brandtzaeg, 58, said in an interview in Oslo on Monday. “What will make the owners put the metal in the physical market? It’s hard to say anything about that.”
Hydro sees the global market largely in balance at the end of 2016, but outflows from warehouses to the physical market represent a ”joker” when forecasting prices, the executive said. The industry has struggled with overcapacity since the financial crisis. Aluminum tumbled 19 percent last year on the London Metal Exchange, the most since 2008, as a glut of production in China offset cutbacks in the rest of the world.
A smaller contango in aluminum prices at the LME is impacting financial investors’ ability to store the metal, according to Brandtzaeg. Aluminum for immediate delivery is about $10 cheaper than the contract for delivery in three months, compared with about a $40 discount a year ago on the LME. Contango is a situation in which commodities futures prices rise as maturities lengthen.
“When contango is tight there’s a bigger chance that the metal instead ends up in the physical market” Brandtzaeg said. “There could be pressure on price.”
Hydro fell as much as 1.8 percent in Oslo trading and was down 1.4 percent at 32.90 kroner as of 10:56 a.m. local time. The stock has dropped 0.7 percent so far this year.
The aluminum industry is reshaping as producers deal with a glut caused by slowing demand from China that created an oversupply of the lightweight metal. Alcoa, the largest U.S. aluminum producer, will split up into an upstream and downstream company.
Hydro announced earlier in May that it had ended talks with Vale SA on the acquisition of Vale’s 40 percent stake in Brazilian bauxite producer Mineracao Rio do Norte. The companies couldn’t agree on price and commercial terms, Brandtzaeg said.
“It hasn’t been relevant to take ownership from anyone else,” he said. “If Vale comes back to us we will be interested to discuss future ownership.”