Material Matters: China, Alcoa, Oil & Nickel

Commodities | Nov 15 2017

A glance through the latest expert views and predictions about commodities. China; Alcoa; crude; and nickel.

-Low confidence in demand outlook for steel in China
-Analysts doubt sustainability of high alumina margins
-Oil prices expected to be well supported in the near term
-Stainless steel still the main driver of nickel performance


By Eva Brocklehurst


After a visit to China ahead of the winter production reductions for steelmakers, Morgan Stanley observes low confidence in the demand outlook has deterred a build-up in inventory. A re-start of 20-30mt of old electric arc furnace capacity and increased usage of scrap are further bearish points.

The price of iron ore is also expected to weaken as a result. The broker notes both mills and smelters are complying with the winter reductions, confident in the government's capacity to enforce restrictions. Winter maintenance has been rescheduled to coincide with the cuts at aluminium smelters.

The aluminium smelters are arguing that energy consumed to re-start operations offsets the savings gained by the restrictions and are lobbying the government, so Morgan Stanley suggests it remains to be seen what will occur next winter. The shortfall of carbon is seen as a short-term issue, as induction furnaces owners turn to carbon production.

The price hike in alumina is widely believed to be driven by speculators, although both the quality and quantity of Chinese domestic bauxite has declined. Morgan Stanley also met with battery makers preparing to begin mass production of NMC 811 by 2019-20 and notes Chinese domestic lithium supply is improving in both quantity and quality, reducing dependence on imports.


Deutsche Bank held discussions with Alcoa management that centred on the sustainability of Chinese curtailments affecting the global supply chain, as well as the company's capital allocation as free cash flow rises. The broker is more confident in Alcoa's ability to generate free cash flow and, as de-leveraging plays out, valuation should re-rate upwards to the peer group average.

Prices have surged for aluminium and alumina, Deutsche Bank notes, as inventory is ostensibly built up heading into the seasonal capacity shutdowns in China. However, other input costs to aluminium smelting have also risen, such as pitch, carbon and anodes because of some unintended consequences of the permanent capacity closures for both environmental and other grounds.

Hence, the broker suggests the cost-push of higher raw material alumina should theoretically support higher global aluminium pricing.

Deutsche Bank notes that with alumina cash margins well above normal levels, many analysts doubt the sustainability of what is considered to be a "made in China" situation. Given Alcoa is net long alumina, current spot prices, if held constant for 2018, could imply US$934m of incremental operating earnings, or around 37% upside to the broker's 2018 estimates for the company. Similarly, spot aluminium could lead to 5% upside to 2018 estimates.

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