The blog was with the mining industry last week, when giving the keynote speech on The Impact of the 'Demographic Cliff' on Demand Patterns at the annual Metal-Pages conference. Mining is seeing similar demand patterns to those in chemicals, whilst the price performance of aluminium shows very similar influences to those at work in oil markets, as the above chart of developments in the LME aluminium price since 1993 shows:
• Prices ranged between $1000 - $2000/t from 1993 until 2005, just as oil prices ranged between $10 - $30/bbl
• They then shot up to peak at $3000/t in 2008, whilst oil rocketed to $145/bbl
• After collapsing in Q4 2008, both have recovered to trade above historical levels
Aluminium is, of course, of great interest in its own right, and as a critical use for caustic soda.
There have been 2 key developments in aluminium markets since 2009. The first was the expansion of China's demand until 2011. The second has been the enormous growth in the role of financial players. The former is well understood, but the latter is quite remarkable:
• Bloomberg report that stocks are now at record levels and are expected to keep rising in 2013 to reach 8.67m tonnes. This is enough to build 62m cars (total annual world volume)
• Production is expanding rapidly due to the high prices, and is well ahead of demand
• The reason is that 80% of all aluminium stocks are locked into speculative financial contracts, and so are unavailable for use by genuine consumers
• This volume has overwhelmed warehousing operations at the major exchanges such as the London Metals Exchange. Buyers usually wait a year to obtain supplies
• Reuters has reported that the wait is deliberate, as the major warehouses are owned by companies such as Goldman Sachs and Glencore - who profit from high storage fees
All this is, of course, completely legal within the LME's rules.
Aluminium is thus another example of the way in which global financial markets have totally lost their true role in enabling price discovery. Instead, they have become a speculative tool for those with access to low-cost central bank liquidity.
The situation can clearly not continue forever. But for the moment, end-consumers have no choice but to pay today's high prices. Similarly, when the party does eventually come to an end, companies (including chloralkali producers) will suffer major losses on inventory values. Whilst operating rates may well crash until the stock overhang is worked down.