ISRI ROUNDTABLE - ISRI ROUNDTABLE - Ali outlook mixed, premiums to hover at multi-year low - CRU

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Dalton Barkerdalton.barker@fastmarkets.comNorth American Correspondent+1 312 292-0942

Chicago 21/09/2016 - Aluminium prices will hover between $1,480 to $1,645 until the metal recovers in the second half of 2017 when reduced Chinese stimulus forces production cuts and rebalances the market, Mike Southwood, senior consultant at CRU, said at the Institute of Scrap Recycling Industries (ISRI) roundtable here.

The People's Bank of China (PBoC) has enacted historic measures to prop-up its economy and maintain GDP expansion between 6.5-7 percent. This has led to a revival in the housing market, but Southwood believes the government cannot keep stimulus levels at this clip for much longer.

"There are signs that Chinese primary aluminium consumption growth is beginning to slow," Southwood said. "Chinese demand growth will continue to ease during the rest of the year as the impact of the government's injection of monetary stimulus wanes and weaker investment growth drags on the construction and industrial sectors."

In response, Chinese demand will be 6.1 percent in the third quarter and 4.4 fourth quarter, while Chinese capacity continues to significantly outstrip consumption over the next five years.

But the global market is set to record its first deficit since 2006 and North America is projected to have a deficit of 2.5 million in 2016 and 2.7 million tonnes in 2017, according to CRU research.

Throughout the third quarter, the US Midwest premium will average 6.3 cents per pound before falling to six cents during the fourth quarter. However, the premium will bounce-back in 2017 and average seven cents, while more-and-more aluminium demand will be generated by the auto industry.

SCRAP BLUES ABOUND

For US-based scrap dealers, the outlook has been dour since 2011 with exports of scrap from the US to China dropping 13 percent per year between 2011 and 2015.

But this year the downturn has quickened with exports down 20 percent year-to-date and signs are starting to emerge that the Chinese government is making an effort to establish an internal ecosystem with its domestic supply growing as old metal approaches its end-of-life cycle.

Southwood predicts that within five years, the Chinese scrap industry will mature and domestic scrap will displace imports.

Chris Lewon, a third generation scrap dealer for Utah Metal Works in Salt Lake City, Utah, isn't optimistic in the interim for secondary players.

A hawkish Federal Reserve and UK referendum vote to leave the European Union has combined to lift the dollar to multi-year highs over the past few months, which has negatively affected the US manufacturing sector – the lifeblood of the scrap industry.

"The last two years we have seen a reduction not only pricing of all commodities, copper in particular, but seeing all the amounts of material have greatly decreased," Lewon said during his presentation. "It makes it a very tough environment."

The pivot point could be the auto industry, which hit record sales last year and was expecting another year of US consumers flocking to dealers nationwide. But that could be slowing down after August data showed sales dipping below 17 million, possibly demonstrating a growing theme for the industry.

"The last bastion of hope is the auto industry and the 17 plus million cars that were produced in 2015, followed up to what looks to be fairly close to 17 million again this year," Lowen said. "I'm not sure if that's gonna be a problem going forward because are they taking sales of future years and trying to bring them forward this year by offering discounts."

Larry Snyder, of Chicago-based United Scrap, agreed that the future is murky for scrap dealers nationwide despite volumes increasing and a plethora of aluminium filling yards.

Snyder has worked in the industry for forty years and said he has survived when others failed because he didn't speculate too much and kept his inventory low; a strategy he implored the audience to adopt.

"My word to everybody here is caution. I'm not a very smart guy, but I have always been successful because I realized at a young age I can't beat the market," Snyder concluded. "My philosophy has always been, if you have more than a load, you have too much."

(Editing by Tom Jennemann)



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