ANALYSIS-Ailing auto demand to keep metal inventories swollen

NEW YORK, May 29 - Inventories of aluminum, copper and steel are piling up as recession-hit consumers steer clear of American cars and a bankruptcy filing looms from General Motors Corp.

Global inventories of copper have seen the least amount of demand deterioration from the automotive industry, as strong investment demand and strong Chinese purchases have shielded the red metal from any U.S.-centric problems.

Carbon steel inventories are down nearly 35 off their peak level last August as service centers have worked down their inventories and steel production has been sharply curtailed.

The global build up is most acute in aluminum, an auto component used in bumpers, hoods and sidepanels. Aluminum warehouses should bulge until the industry turns the corner.

This is not expected until late in the year at the earliest as GM and rival Chrysler work through insolvency.

"Obviously Chrysler is in shut-down now; GM is going to go into an extended summer shut-down and that sort of stops the whole supply chain," said Randall Scheps, director of marketing for ground transportation for aluminum maker Alcoa.

On Thursday, GM reached a debt-for-equity deal with some major bondholders. This could pave the way for fast-track bankruptcy backed by the U.S. Treasury. The bankruptcy filing is expected on Monday.

Alcoa's Scheps believed that with GM moving into bankruptcy protection, domestic demand will continue to decline.

Total pounds of aluminum consumed in the U.S. auto sector is expected to fall by 35 percent in 2009 from year-ago levels, he said, adding that demand will continue to track with inventory builds.

Since the start of the year, aluminum stocks in LME warehouses have surged more than 80 percent and now stand at an all-time record level above 4.2 million tonnes.

In the U.S. auto belt the numbers are just as grim, with aluminum supplies in warehouses in Chicago and Detroit up more than 30 and 76 percent, respectively.

"It suggests that the metal-using industries in the U.S., and that would be to a great extent be the automotive industry, are getting hit and having a big impact on U.S. demand," said Bart Melek, Global Commodity Strategist with BMO Nesbitt Burns in Toronto.

According to the Aluminum Association, the average U.S.-built automobile consists of about 326 lbs of aluminum, or about 8.7 percent of the car's weight.

Aside from aluminum, other metals like copper and steel have been feeling the heat as well.

Copper levels in warehouses of the COMEX division of the New York Mercantile Exchange are up nearly 80 percent since the start of the year and show no signs of letting up.

PRICES TELL DIFFERENT STORY

A general bid across the broader commodities complex has lessened the blow to aluminum futures on the LME MAL3>, which are down only about 6 percent for the year.

"I think you can relate that to the fact that there is a bid in for commodities," said Bill O'Neill, partner of LOGIC Advisors in Upper Saddle River, New Jersey. Aluminum has not participated, for example, to the level that the copper market has, but there's just some general interest there."

Patricia Mohr, economic and commodity market specialist with Scotiabank Group, agreed, pointing to China as the main driver of metals prices this year.

"China is building its inventories and that's what is driving these prices up," she said. "The U.S., while still very important, is not driving the metals market anymore."

Mohr expected to see U.S. motor vehicle production rebound in the fourth quarter.

"At that time, you will see a (demand) improvement and inventories should start falling again."

Shawn Hackett, president of Hackett Financial Advisors, Inc. in Boynton Beach, Florida, cited a growing investment demand for commodities for price defiance in some industrial metals.

"I think that the market has already reflected that reality and has now begun to price in some stabilization in the industry," he said.