Steadier auto sales a bit of good news for aluminum

By Chris Kelly - Analysis

NEW YORK (Reuters) - Budding signs of stability in the ailing U.S. automotive sector will kick-start a quicker demand recovery for aluminum, even as the industrial metal's supply base in U.S. warehouses will continue to swell from the industry's severe downturn.

Further demand deterioration for the lightweight metal is expected during the seasonally slower summer months, as automotive companies change production lines and curtail output during the peak energy-consuming period.

Still, analysts suspect any turnaround in consumption will come sooner, rather than later.

"With a bottoming out in auto sales and production we could see aluminum demand start to pick up again as early as September or October," said Catherine Virga, senior base metals analyst with CPM Group in New York.

"When we are coming from such low levels of production and sales, any sign of recovery is going to have an effect on the market," she said.

Data on Wednesday continued to show vehicle sales by the big three U.S. automakers -- General Motors (GM.N), Ford (F.N), and Chrysler -- on the decline in June.

Ford, the only U.S. automaker not supported by emergency U.S. government funding, reported a 10.9 percent drop in sales in June, while GM posted a 33.6 percent decline and Chrysler came in with a 42 percent slide.

According to the Aluminum Association, the average U.S.-built automobile contains 326 pounds of aluminum, or about 8.7 percent of its weight.

Despite the gloomy sales figures from the Big Three automakers. industry-wide annual sales were reported at 9.69 million units, according to Autodata, down from 9.9 million in May. The data offered some glimmering hopes, but fell short of marking a turnaround in the U.S. auto market from a punishing four-year decline.

Since November, London Metal Exchange registered warehouses in Detroit have seen average monthly net inflows of the industrial metal at around 54,000 -- enough to make around 300,000 vehicles -- or about two-thirds of the decline in monthly auto sales in the U.S.

"The deliveries could well be deferrals by the Big Three automakers, and other industry-related companies," said Mark Pervan, senior commodities analyst with AZN.

If companies are deferring deliveries and running down their own stocks, it could mean a big rise in apparent aluminum demand once vehicle sales pick up, although with stocks at almost 4.4 million tonnes, inventories seem plentiful even if much of the material is tied up in long-term financing deals.

"We could either see a slowing in the build-up or even some drawdowns as producers restock ahead of what they see as new demand," CPM Group's Virga said.

Total automotive inventories at the end of May were at 67 days of supply, down from 85 days at the end of April.

"Total inventories have fallen very dramatically," said John Gross, publisher of the Copper Journal.