Macquarie Research, Aluminium - impending supply growth from china yet still short term bullish

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Commodities Comment
Aluminium - impending supply growth
from china yet still short term bullish
Feature article
 In today’s feature article we highlight that rising aluminium output from China
through the 1H11 is a complete given! What is less obvious is how quickly the
supply will ramp up. With Chinese consumption running well above production
of aluminium heading into January/February, even a strong ramp up in supply
is set to see the Chinese market in deficit through at least March and April.

Latest news
 Base metals were largely unchanged on Tuesday, although aluminium
continued to edge higher. Aluminium closed at $2578/t ($1.17/lb) on Tuesday,
its highest level since 3Q08.
 According to the latest WBMS trade data, Chilean exports of copper to China
fell by 48,000t MoM in January (from 134,800t in December to 86,856t). The
Chilean export data is often a good indicator of Chinese imports in the
following month (in this case for February) and is consistent with our view that
we are set to see a significant drop in Chinese refined imports MoM in
February (preliminary estimates will be released in mid March). Meanwhile,
KGHM reported copper production of 425,000t for 2010 on Tuesday, down
from 439,000t in 2009.
 China’s official February PMI came in at 52.2, down from 52.9 in January.
The Jan/Feb average is a little weaker than this time last year, so would
suggest growth is a little more subdued than in 2010. This is not surprising,
given that policy looks to be more restrictive than it was then and cost
pressures higher, and perhaps the lesson from 2010 is that activity is more
resilient than we think and that margin changes in attitudes from policy
makers can very quickly shift the direction of activity. In our opinion this is a
decent result striking a decent balance between growth and inflation.
However, the lower number did push the October contract for SHFE rebar
down 1.3% in the day, as steel market traders became more nervous
regarding future demand conditions.
 Meanwhile, the US ISM manufacturing index rose again to 61.4 in February,
suggesting manufacturing sentiment continues to improve. Furthermore, the
gap between new orders and inventories increased in the month to 19.2
points, its highest level since January 2010, implying the forward outlook
remains exceptionally strong. This should boost sentiment in a more
sustainable US commodity demand push through 2011, even with the spectre
of higher energy prices and an ongoing drag from the construction sector.
 The latest 10-day production release from the China Iron and Steel
Association showed some positive news. Steel output rose 5.3% sequentially
in the first 20 days of February as mills continued to ramp up during and after
Chinese New Year, incentivised by robust demand conditions and high prices.
Production came to 652mtpa for the first 10 days, and 662mtpa for the middle
10 days of the month - the highest since May 2010. Chinese output has now
risen by more than 90mt on an annualised basis since mid-October. We
expect crude steel output growth to continue through March, towards the
700mtpa level as construction and manufacturing pick up seasonally.