Guessing game continues over aluminium demand

This could be the year the world at last stops churning out much more aluminium than it can use, as economic recovery begins to stoke demand while some producers cut output after years of falling metal prices.

At least that is what a few aluminium smelters and bankers are predicting, going against a consensus view that surpluses of production over demand are set to continue.

Whatever happens, prices this year are unlikely to rally because there is a huge overhang of stocks, estimated at 10-15 million tonnes globally, although much of this is kept sitting in warehouses earning cash via investment deals.

The price of aluminium — mainly used for packaging, construction and transport — has shed nearly 50 per cent since 2008, forcing loss-making companies to slash capacity in recent years.

“It’s a market in deficit at the current time, as it should be,” said Colin Hamilton, head of commodities research at Australian bank Macquarie.

“This is the way commodity markets work — prices move down to a level where supply is pushed offline, and that’s exactly what we’ve seen in this market.”

Russia’s Rusal, the world’s biggest aluminium producer, estimates that producers outside of China cut up to 1.2 million tonnes of capacity last year and further reductions of 1 to 1.5 million tonnes are expected in 2014.

“The most important trend in the industry is that starting from the fourth quarter 2013, we see the aluminium market in deficit on strong consumption and production cuts,” said Rusal deputy chief executive Oleg Mukhamedshin.

While such views are not surprising, coming from an aluminium producer, Rusal has been joined by a handful of institutions such as Macquarie and Barclays in forecasting a deficit this year.

They are bucking the consensus view of another surplus after nearly a decade during which smelters have produced more than needed by industry. Analysts polled by Reuters expect a surplus of 568,400 tonnes this year, narrowing to 500,000 tonnes in 2015.

Macquarie, however, expects world consumption of primary aluminium this year to rise to 53.24 million tonnes, surpassing production at 52.85 million tonnes, leaving a gap of 390,000. (This does not include recycled or secondary aluminium, which is a separate market, used mainly in alloys.)

The most bold forecast is by Barclays, which calculated that the global aluminium market was already in a deficit of 726,000 tonnes last year, increasing to 1.07 million tonnes in 2014.

“What’s moved really fast, even more than supply, is demand,” said Barclays analyst Sudakshina Unnikrishnan.

“Demand has been very strong and has surprised to the upside from China. This has tended to be overlooked because the focus has been so much on the supply side.”

Demand in China, which accounts for nearly half of the global market, jumped by 13 per cent year-on-year in October/November compared with average 7 per cent growth during the first through to third quarters, according to Barclays. At the same time, demand has improved elsewhere as Europe emerges from recession and the US recovery gains pace.

Use of the light metal in autos is growing as carmakers cut car weights to meet stricter emissions laws. Consultants Ducker Worldwide expect North American automakers to boost aluminium use by 60 per cent by 2025.

Ford Motor Co. unveiled a new version of its best-selling F-150 pickup truck using 95 per cent aluminium in the body. Most analysts see the massive Chinese market as roughly in balance, but a new leadership bent on closing polluting factories and cutting subsidies to state-owned firms as well as a ban imposed by Indonesia on exports of unprocessed ore could change the balance there as well.

Indonesia, which wants minerals to be processed at home, has supplied two-thirds of China’s needs of aluminium raw material bauxite and faces obstacles in establishing more of its own processing plants.

“With the export ban you are cutting off a significant supply to the Chinese market ... And within China there are efforts to restrict the aluminium oversupply. So it’s going to be tight in the Chinese market,” said Nic Brown, head of commodities research at French bank Natixis.

Brown forecasts a roughly balanced market this year, which is also the prognosis of analyst Paul Adkins, with consultancy AZ-China.

Even analysts forecasting a deficit this year do not expect a strong price recovery due to an overhang of inventory, including over 5 million tonnes in warehouses registered by the London Metal Exchange.

But continued healthy demand as global economic growth ramps up, combined with scant new smelter projects, could lead to a much different environment in coming years, said Adkins.

“2015 is where it gets interesting ... now we start to see some serious inroads into the inventory and a decent recovery in price.”

“If you take into account even a modest 3 per cent (demand) growth pattern, then we need a new smelter every year going forward. Once we get past about 2016, new metal supply starts drying up. There is nobody out there who has the interest and the capital to build the extra capacity.”