Recent reports from China Customs show that at 752kt, April imports of bauxite
were up a staggering 501% compared to April last year. On a
year-to-date basis, bauxite imports are up 279% from the corresponding
ytd last year at 1.9Mt.The production of alumina in April was up
51% on the previous April and, unsurprisingly, direct imports of
alumina to China fell 5.8%. Overall consumption of alumina was up only
15% for January-April. The price of alumina has begun to fall.

What
is it about aluminium? JP Morgan notes that aluminium is thrown into
the mix with the other metals, of which copper tends to be the
benchmark. But copper has unique characteristics of present situation
and future outlook, and to equate aluminium with copper, says JP
Morgan, is just plain wrong.

Aluminium runs at inventory levels
that are far more comfortable than copper, notes Morgans. China
exports, rather than imports. There is enough bauxite to allow for a
9.5% increase in alumina supply in 2006 and a 7.5% increase in 2007.

Another
strange phenomenon is that the bauxite industry does not suffer, as
copper does, from a lack of trucks, tyres and engineers. Why this is
the case is a mystery to Morgans as well. But either way the copper
“theme” of a three year lag in production response to current high
margins is not a problem the bauxite industry faces.

Copper has
only 1.8 weeks of inventory, and there are still billions of dollars of
fund investment being thrown at it. In this scenario it is no surprise
that Morgans suggests “any price outcome is possible”. It is also no
stretch to see why the copper price has shrugged off its correction
without undue devastation. Aluminium, on the other hand, has always
underperformed copper, as well it might.

Morgans believes that as
a “lower risk” metal, that is one that behaves a bit more normally than
the others, it is also less of a risk in a bear market. And while we are
still in a bull market, with pressure building it is possible
aluminium will “break ranks” and head south.

This shouldn’t, in
theory, affect copper or the other metals, but Morgans suggests that if
one goes then the sheer weight of speculative money will be spooked and
the whole complex could come tumbling down.

This is not about to
happen immediately. Standing in the way of any significant fall in the
aluminium price at this time is one factor that all metals have had to
endure, aluminium included, and that is industrial dispute.

The
mighty AWAC joint venture between Alcoa (60%) and Alumina Ltd (AWC)
(40%) employs 9,000 Americans across 15 operations. Today the current
labour agreement expires, and the employees are ready to do battle. As
has been the experience between Grupo Mexico and its copper mine
employees, expectations are for no smooth rollover of agreement, and
many issues, right down to health cover, are at stake.

Credit
Suisse reports that the impact of a work stoppage is potentially 3.4%
of global alumina supply and 3.5% of global aluminium supply. Credit
Suisse rates Alumina an Outperform with a target price of $9.98. In
fact of the ten brokers/advisors in the FN Arena database, only two –
GSJB Were and Aspect Huntley – presently rate Alumina as Hold, with all
the rest being Buy. The average target price is $8.50 compared to
yesterday’s close of $6.93.

Both Merrill Lynch (having issued
several warnings over the past few weeks and again this morning) and JP
Morgan are included in the Buy school, which tends to belie the reports
published today and highlighted in this article. The assumption one
would have to draw is that Alumina (the company) may yet be ready for
reassessment over a longer term basis, as supply disruption dominates
the short term.

Peter Fray

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