8A, Approve Contract with Eureka Recycling

Home Browse Search

DEMAND DOVVNTURN Plummeting demand, in turn, has caused the industry's biggest oversupply in spite of the fact that 4.4 million tons per year, or 11.5 percent of global capacity, have been curtailed (70 percent in China and 30 percent in the West) in a context where approximately 70 percent of global aluminum output is unprofitable. Every day LME (London Metal Exchange) warehouses report higher aluminum inventories. Visible aluminum inventories have increased from 3.7 weeks of consumption in the third quarter of 2008 to more than five weeks in the middle of the fourth quarter. We expected to close the year with a visible surplus of close to 1.8 million tons, the highest ever in a single year. Demand has been hit so .much that supply can't catch up yet and will probably not catch up until demand bounces. Still, we expect another important round of aluminum output cuts in China and the West to start soon given intense economic losses that later will help prices bounce with the same violence. What's behind the sharp contraction in demand? The main factor behind plummeting demand has been the unprecedented increase in risk aversion and fear that the global financial crisis unleashed in early September 2008 (as measured by the VIX (Volatility Index). Just to give you an idea, at the peak of uncertainty after the terrorist attacks of Sept. 11,2001, the VIX index increased from 20 to 40, but in less than two months, it came back to normal levels of below 30. Well, the VIX index skyrocketed from 20 in early September of 2008 to a record high of 90 by mid-October. NO CONF~DENCE Collapsing confidence caused credit to dry and market participants to suspend purchases of all types of items, especially demand for big-ticket items that can be intensive in aluminum, such as autos and machinery. Additionally, the entire aluminum supply chain started to destock as much as possible, resulting in a further intensification in the fall in aluminum demand. U.S. aluminum demand from the transportation sector was down 40 percent in November vs. July, while demand from the construction sector was 34 percent lower and electrical sector demand was down by 13 percent We believe that confidence is today the most important variable to follow because demand will continue to trend along with this variable. If demand is to bounce, it will have to be preceded by a sharp fall in fear and a return to normal levels of confidence. If confidence is indeed restored, we believe a subsequent sharp bounce in demand will follow. As of early January, the VIX was trading around 43, a sharp improvement relative to November and October, for which the VIX was in the range of 80. Government actions have so far stabilized fear at lower levels. Still, there is a long road ahead of us in order to reach normal levels (below 30 as indicated by theVIX). How long will this take? Nobody knows with certainty, but the popular consensus has that happening sometime in the first half of 2009.