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Aluminium Analysis and forecast Q1 213

 

Each Quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the Precious and Base Metals. Below is the Aluminium report, to read the full report covering all the metals in pdf form click here: Quarterly Metals Report April 2013. Subscribers to FastMarkets Professional have access to the report before it is published here.

Aluminium Price Analysis Q1 2013

Aluminium is in an interesting situation in that the rampant oversupply that has dogged the market for six years has so far failed to force the industry to rationalise output. Clearly, the laws of supply and demand have been distorted by the availability of cheap money that has made cash-and-carry deals economically viable and a set of LME rules and logistical restrictions have also enabled warehouse companies to restrict the outflow of metal from their sheds.

 The combination of these two practices has meant traders and producers have found profitable ways to keep surplus metal off market. While these practices are economically viable, it is best to assume the status quo will last. There is a risk that reality catches up with the market – in which case the current situation could unravel in a disorderly manner – but the fact that efficient markets have not brought about a correction already suggests these aberrations are likely to continue. This means our outlook is therefore based less on the fundamentals and more on subjective reasoning. For the past 12 months, aluminium prices have oscillated sideways either side of $2,000 per tonne and in a range of $1,827-2,200. Given the presence of massive oversupply and continuing supply surpluses, high-cost producers must regard themselves lucky that prices have not responded to the oversupply by heading lower. Needless to say, they cannot feel particularly comfortable with the current situation so we feel they will have been keen hedge sellers into price strength – this has effectively capped the upside above $2,200; we also feel that the cap will remain in place for a considerable time until the market looks set to move back into a supply deficit.

FastMarkets Aluminiumn Report Q1 2013Price weakness, however, has been limited by the combination of surplus metal being held off market, fears that lower prices will prompt production cuts and a pick-up in pricing by consumers who want to capitalise on lower prices to help offset the high premiums they must now pay. On balance, we expect more of the same throughout the rest of 2013 – i.e. more rangebound trading either side of $2,000, similar to last year’s average of $2,019. This allows for a brighter economic outlook to unfold later in the year, albeit for a market still burdened with high stock levels. Given the structure of the market and the stockpiles, we feel that market mechanics will now work to keep benchmark prices rangebound. Should demand pick up and tight availability lead to backwardations and even higher premiums, we would expect profit incentives to lead to the release of more metal from cash-and-carry deals. If prices sink below $1,800, we would expect more cuts to output. Should, for whatever reason, metal start to flow out of financing deals and back into LME-bonded warehouses, metal is still likely to be kept off market due to the large exit queues that are now well established.

Aluminium Supply and Demand in 2012

Global primary aluminium production increased 1,447,000 tonnes or 3.2 percent to 46,169,400 tonnes in 2012 from 2011, according to data from the World Bureau of Metal Statistics (WBMS). Of that total, China produced 20,268,000 tonnes, which accounted for some 44 percent of global output. China’s production in 2012 rose 12.7 percent or 2,280,000 tonnes on 2011. As this data implies, China was the main area of increased production, although output in the Arabian Gulf States increased 180,000 tonnes. Production dropped in North and South America, Europe, South Africa and Oceania and was stable in East and Central Europe, according to International Aluminium Institute (IAI) data. Aluminium demand reached 45,750,000 tonnes in 2012, up 2,915,000 tonnes or 6.8 percent on the previous year, according to WBMS data. China consumed an estimated 20,880,000 tonnes – some 45 percent of global consumption. In 2012, the market therefore had a supply surplus of 419,400 tonnes, down from a surplus of 1,887,000 tonnes in 2011. Production cuts in most areas outside China helped rein in the surplus but it still meant 2012 was the sixth consecutive year of surplus, during which time some 4.7 million tonnes has accumulated.

Aluminium Outlook for 2013

We expect another supply surplus this year although that could change – prices have recently tested and breached the lower end of their three year trading range. We would not be surprised if further weakness were to prompt producers to announce more cuts to output. Conversely, we are more optimistic for stronger demand – we expect the shift from destocking in 2012 to lead to an improved apparent demand this year but whether these developments will be enough to change the supply/demand balance enough to create a supply deficit remains to be seen.

Supply Outlook

Production will increase an estimated 7.5 percent to 49,600,000 tonnes this year, boosted by the restart of idle capacity and the commissioning of new operations. In South Africa, the Hillside smelter will resume full production, having lost one third of its capacity last year after an incident and a full year of production should be seen at the Alma smelter in Canada after output was hit by industrial action last year. In addition, new capacity is being ramped up at Saudi Arabia’s 630,000-tonne-per-year Ras Az Zawr smelter – output there should reach 230,000 tonnes this year. India’s 329,000-tonne-per-year Mahan smelter is expected to produce 125,000 tonnes this year, while the 560,000-tonne-per-year Korba smelter is expected to produce an additional 150,000 tonnes this year. Chinese aluminium capacity is expected to climb a further 2.6 million tonnes via new capacity and expansions. In most metals’ markets, the prospect of a 7.5-percent increase in supply in this economic climate would seem too fast but in aluminium’s case such growth is not an issue – aluminium’s compound annual growth rate (CAGR) is one of the strongest of the metals. In the 10 years between 2001 and 2011, aluminium’s CAGR was six percent, almost double the rate in the other base metals. In 2013, with the world economy moving away from destocking, apparent demand is likely to receive a boost and there may well be room for some restocking in the stronger economies of the US and China. We generally expect demand to grow faster in 2013 – we see stronger recoveries in China and the US, which in turn are likely to feed through to stronger recoveries in emerging markets too. Actual demand in Europe should remain subdued but apparent demand may well improve while the destocking cycle ends. In 2012, demand in the EU27 dropped 7.7 percent on 2011, according to the WBMS. We would not be surprised if demand rebounded by around one percent in Europe this year. In addition, the price advantage aluminium enjoys over copper is likely to continue to win it market share from the red metal. Copper is 290 percent more expensive than aluminium compared with an average of 75 percent between 1981 and 2010 so it is little wonder that aluminium has a great demand outlook. Indeed, we wonder whether it is aluminium’s strong demand profile that is giving producers and traders the confidence to amass so much metal in inventory. On balance, we are looking for aluminium demand to grow around eight percent this year after growth of 6.8 percent in 2012, with real growth coming from regions outside Europe, although Europe might see some pick-up in apparent demand while destocking ends.

Aluminium Stocks

Reported stocks at exchanges at the end of March totalled 5.735 million tonnes, up 82,655 tonnes from the end of 2012. LME stocks in the first quarter climbed just 19,675 tonnes; this slower rate of increase suggests that the supply surplus is easing. Producer stocks declined 142,000 tonnes in 2012 to 1,262,000 tonnes, according to the WBMS. Overall, total reported stocks held at exchanges, producers and at Japan’s three main ports total some 7.3 million tonnes. On top of that, there are thought to be significant stocks held off warrant – some estimates put total aluminium stocks at around 14 million tonnes, which would be enough to supply 30 percent of last year’s consumption. While banks have easy access to cheap money, the aluminium stockpile – worth some $27 billion – can probably be financed without too much trouble. But if financing becomes more costly or liquidity tightened, carrying such high stocks might be deemed imprudent. Aluminium Stocks Q1 2013Cancelled warrants on the LME stood at 1,945,700 tonnes at the end of March, some 37 percent of total LME stocks, which suggests a considerable amount of metal has been earmarked to be delivered out. Whether this is metal wanted by consumers to avoid having to pay the high physical premiums, or whether it is metal waiting to be taken off warrant and put into financing deals outside the LME warehousing system remains to be seen. Global output, according to IAI data, continues to climb – daily production averaged 123,500 tonnes in 2012 compared with 120,500 tonnes in 2011 but it has averaged 129,000 tonnes in the first two months of 2013. Production outside of China fell to 69,500 tonnes per day in 2012 from 71,800 tonnes per day in 2011 but Chinese output climbed to 54,000 tonnes per day from 48,700 tonnes per day. With China’s State Reserve Bureau (SRB) stepping up its purchases of aluminium to support the domestic industry, it does look as though China is struggling to let market forces rationalise production, which is no doubt due to socioeconomic reasons. But with many of the country’s smelters reporting significant losses in 2012, production cuts are likely if prices remain under pressure.

Primary Aluminium Production (in thousands of tonnes)

IAI reporting area ex-China China Global total Global daily average
Year 2009 24,022 12,964 36,986 101.3
Year 2010 25,022 16,131 41,153 112.7
Year 2011 26,203 17,786 43,989 120.5
Year 2012 25,453 19,754 45,207 123.5
 
Jan-Dec 2011 26,203 17,786 43,989 120.5
Jan-Dec 2012 25,453 19,754 45,207 123.5
 
Dec 2011 2,237 1,501 3,738 120.6
Jan 2012 2,189 1,517 3,706 119.5
Feb 2012 2,050 1,548 3,598 124.1
Mar 2012 2,168 1,564 3,732 120.4
Apr 2012 2,095 1,531 3,626 120.9
May 2012 2,156 1,678 3,834 123.7
June 2012 2,080 1,684 3,764 125.5
July 2012 2,138 1,670 3,808 122.8
August 2012 2,134 1,749 3,883 125.3
September 2012 2,057 1,672 3,729 124.3
October 2012 2,134 1,717 3,851 124.2
November 2012 2,085 1,662 3,747 124.9
December 2012 2,166 1,762 3,928 126.7
January 2013 2,157 1,760 3,917 126.4
February 2013 1,955 1,729 3,684 131.6

Source: IAI One development last year that could have affected China’s ability to produce aluminium was Indonesia’s ban on the export of bauxite. Although the ban did not last, the fact that another ban on ore exports will roll out in 2014 requires careful monitoring. While China is likely to find ways to import enough raw materials to feed its smelters, the cost of that feed may increase, which in turn would raise the country’s costs of production. As the trade table shows, one notable development has been the drop in bauxite imports, while alumina and primary metal imports have climbed.

Chinese trade (thousand tonnes)

2010 2011 2012 Jan-Feb 2012 Jan- Feb 2013 Change
Exports
Primary aluminium 194 82 125 22 17 -22%
Aluminium products 2,882 2,622 2,796 357 410 -7%
Imports
Primary aluminium 230 225 516 22 26 18%
Aluminium products 591 577 63 73 +16%
Alumina 4,312 1,881 5,020 723 840 16%
Bauxite 30,070 45,234 17,900 32,628 36,070 -10.6%

Source: Official customs statistics

Conclusion

There are many crosscurrents affecting the aluminium market; a look at the supply side of the equation shows a market in surplus and one burdened with massive stockpiles. A look at the price chart shows prices have been oscillating sideways since late 2011. With prices at the bottom of the sideway range in early April, the chances of production cuts has risen, which in turn may well start to provide support. On the other hand, aluminium demand is holding up well and the relatively low price is enabling the market to gain market share, which is bullish for the long-term outlook. In addition, the mechanics of the market are enabling surplus metal to be financed profitably, so for now a large amount of the surplus metal is being kept off market to the extent that spot metal carries a hefty premium; indeed, premiums have recently set fresh record levels in the US. Overall, we remain bullish for aluminium’s demand in the long term but we feel the supply side will remain bearish – there is abundant idle capacity that could be reactivated to accommodate any rise in Chinese and North American growth. Our concern is that the aluminium market is not responding to the laws of supply and demand; we wonder whether this aberration can last. Still, it has for a long time so the chances that it will continue to do so are good. For now the economics of keeping metal off market seem likely to remain in force, but we would point out that changes in QE could alter the dynamics of cash-and-carry deals, which might start to happen as early as the end of the year. Although we feel it will more likely happen sometime in 2014. At present, the main bright spots on the global economic front are North America and China; we think the latter will gain momentum as 2013 progresses. For now the US economy has managed to shake off the potential headwinds from the fiscal cliff and the Sequester but we should not get too complacent that this will remain the case – some hard decisions about the US debt and deficit will need to be made at some stage. Still, assuming the US policymakers avoid shooting themselves in the foot, the US economy should remain a bright spot in 2013, especially for aluminium, which should benefit from continuing recoveries in the automotive and construction industries. FastMarkets Al stocks For 2013, we expect prices to spend most of the time in the $1,750-2,300 range and would look for an average price of $2,000. In the first quarter, prices averaged $2,002; we expect prices to trade in the $1,750-2,100 range during the second quarter.

Global Supply/Demand Balance in Primary Aluminium (million tonnes)

2008 2009 2010 2011 2012(f) 2013(f)
Production 40 37.5 42.3 44.7 46.2 51.0
Consumption 37.6 35.4 41.3 42.8 45.8 50.4
Balance +2.40 +2.10 +1.00 +1.9 +0.4 +0.6
Price $2,571 $1,664 $2,172 $2,400 $2,000 $2,000

Sources: IAI, WBMS, fastmarkets.com forecasts Appendix One

Actual Recent and Potential Major Additions to Western Aluminium Capacity

Country Company Smelter Capacity (tonnes per year) Timing/Remarks
Abu Dhabi Taweelah 353,000 Rising to 368,000 in 2013
Qatar Doha 450,000 Rising to 605,000 in 2013
Bahrain Alba Knuff 500,000 Start from 40,000 in 2013, 140,000 in 2014 full capacity 2015.
Iceland Century Helguvik 90,000 To come on stream 2015
India BALCO Korba 12,000 Rising to 240,000 in 2014.
India Vedanta Jharsuguda II 410,000
India Hindalco Mahan 140,000 Rising to 346,000 in 2013
Indonesia Nalco Kalimantan 500,000 Construction expected to begin in mid-2011. Start-up in 2015
Malaysia Rio Tinto Samalaju Sarawak 720,000 Plans terminated
Malaysia State Grid/Corp of China Sarawak 185,000 First production expected in 2015
Oman Rio Tinto led consortium Sohar 175,000
Qatar Norsk Hydro/Qatar Petroleum Qatalum 585,000 Ramp-up delayed because of power problems. Full capacity expected by end of Q3.
Saudi Arabia Alcoa/Ma’aden Ras Azzour 740,000 95,000 in 2013, rising to 740 in 2015.
Saudi Arabia Chalco/Saudi consortium Sino-Saudi Jazan 335,000 Start 2012-2013, rising to 1 million tonnes

Sources: Company data, various press reports

Appendix Two

 

Recent non-Chinese production

Company Country Smelter Impact on 2012 output
Rio Tinto Alcan UK Lynemouth 160,000t
Alcoa Italy Portovesme Still operating, may close in November
Alcoa Spain La Coruna 28,000t
Alcoa Spain Aviles 30,000t
Zalco Netherlands Vlissingen 194,000t
Hydro Australia Kurri Kurri 180,000t
Vimetco Romania Alro Slatina 51,000t

Sources: Company data, various press reports

Will Adams

About Will Adams

William Adams has been involved in the metals markets since 1982 – he has experience in many areas of the market from researching to trading and has worked in London, New York and Tokyo.