May 4 -- Aluminum is defying logic when it comes to basic economics. Spot aluminum premiums have climbed to their highest price in nearly five years, in the face of mounting warehouse stockpiles. The amount of aluminum stored in warehouses has climbed to a 32-year high. In the past year alone aluminum stocks have risen 25 percent, paradoxically futures prices are up 67 percent.
Despite high stockpiles, the metal's ascent is being driven by tight supply-chain dynamics. The metal in warehouses is tied up by financial deals and ETF's. Many commodities traders are nervous about the current situation, claiming that new ETF's for aluminum will increase the surplus. Alcoa predicts that regional aluminum premiums to remain solid throughout 2010 as global consumption increases 10 percent and a significant majority of London Metal Exchange stocks remain locked up in warehousing deals.
The high-stockpile, high price situation is dangerous to aluminum's future. Citigroup projects that over the next four years, rising prices will prompt producers to rev-up output. This output will far exceed consumption, and if the financials decide to abandon their aluminum positions, the metal's price will experience a precipitous drop.
A group of U.S. aluminum extrusion manufacturers have filed a claim that China's foreign exchange policy acts as a $514 million subsidy to makers of goods used in construction, including window and door frames. This week, the U.S. Commerce Department announced that it will investigate. The Commerce Department will also look into what role possible Chinese currency manipulation plays in the issue. The United Steelworkers Union, paper and aluminum companies, as well as lawmakers are putting pressure on the Obama administration to determine that China's currency policy undervalues the Yuan and amounts to a subsidy and that tariffs should be imposed. Both Canada and Australia have moved to curb imports of aluminum extrusions from China.
Norway's Norsk Hydro ASA will purchase Vale SA's (NASDAQ:VALE) aluminum business for $4.9 billion, the largest-ever international acquisition by a Norwegian company. The acquisition will entail full or partial ownership of mining, alumina-refining and alumina-production facilities. Vale will receive $1.1 billion in cash and shares equivalent to a 22 percent stake in Norsk. Last Tuesday, Norsk released its Q1 earnings report, which indicated that the company returned to profitability in the first quarter and grew its revenue 10 percent.