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Supply bottlenecks, demand growth to boost aluminum prices

Bnamericas Published: Thursday, May 29, 2014

A strong demand outlook for aluminum will offset oversupply and lend support to prices in 2015, according to Caroline Bain, senior commodities economist at Capital Economics.

The aluminum market has been in surplus from 2007 to the present due to large increases in capacity in China and the Middle East. Chinese production grew 6% last year and output is expected to grow by 10% to slightly more than 26Mt compared with demand of 25.8Mt in 2014, according to CRU Group.

But aluminum demand continues to rise as, in addition to traditional uses, the metal is being increasingly used as a substitute for the more expensive copper in electric cabling and for steel in cars.

"Recovering auto and construction sectors in the developed world, particularly the US, are positive for aluminum," Bain wrote in a note. "What's more, aluminum's widespread use in consumer goods also suggests it will benefit from China's economic rebalancing towards more consumer-led growth."

The economist is forecasting a price of US$2,000/t by end-2015. Aluminum has been trading at under US$1,800/t in recent weeks and closed Thursday at US$1,784.50/t on the LME.

TIGHTER MARKET

This price is well below the marginal cost of production of many producers, although record high premiums of over US$400/t have helped them to cover costs. Premiums have risen despite a global aluminum surplus due to a lack of readily available metal, according to Bain.

The apparent tightness is despite huge stocks, which are estimated to total over 10Mt. However, these stocks are effectively "off-market" according to Bain. "There are queues as long as two years to take delivery of metal held in some LME warehouses," she wrote. "Meanwhile, a large portion of Chinese stocks is tied up in financing deals."

But this environment could be about to change as Chinese authorities are taking steps to reduce commodity-related financing deals and the LME has been taking steps to cut warehouse queues.

In addition, the Chinese government is trying to cut production at inefficient operations in an effort to curb overcapacity in the industry. "China's output may falter in 2015 as part of official efforts to curtail inefficient, energy-intensive industries or owing to a lack of bauxite due to Indonesia's export ban," Bain wrote.

PRODUCTION CUTS

Adding support to prices are the output cuts that have been announced by many producers ex-China. Once all its announced curtailments and closures are complete, US-based Alcoawill have cut around 800,000t or 21% of its capacity.

At the same time, the world's biggest producer Rusal saw output drop by 316,000t or 8% in 2013 and is planning to cut back by a similar amount this year. Rio Tintoand Norsk Hydro have also announced capacity cutbacks.

Barclays Capital is expecting a 275,000t deficit this year due to the cuts and is forecasting an average price of US$1,838/t in 2014.

The only caveat is that curtailing production does not entirely remove the problem of excess capacity, as it can be brought back onto the market at any time.

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