Each quarter FastMarkets and Sucden Financial produce an analysis and forecast report on the precious and base metals – The Sucden Financial Metals Reports, Jan 2016.
Below is the aluminium report, to download a PDF copy of the full report covering all the metals in pdf form click here.
Subscribers have access to these reports before they are published through the research tab in FastMarkets Professional.
Aluminium – Stock overhang likely to cap upside
Aluminium prices set a low in November at $1,432.50 per tonne but have since fluctuated sideways either side of $1,500. There have been numerous output cuts, mainly in China, although Alcoa has also slashed around 810,000 tonnes since March 2015. China has said it will cut more and delay the ramp-up of new capacity, but given a wide producer base and with governments keen not to see unemployment rise, we feel the industry will not be disciplined enough to make and stick to enough cuts to create the large supply deficit that is needed to rid the market of the stock burden. This quarter’s range is likely to be supported at $1,430, with resistance at $1,560.
Overall trend – The aluminium market seems to have benefitted the most from the massive levels of financing after the financial crisis, taking advantage of the abundant liquidity and cheap borrowing that quantitative easing provided. Unfortunately, the market is now paying the price – a massive stockpile has been built up and the higher prices created by financing – by keeping metal off market – incentivised even more capacity to be built, which is now in the stages of being commissioned. An estimated five million tonnes of new capacity could be brought on line in China this year unless the owners decide to delay the start-up. But given it is low-cost production, why would they? Although aluminium demand is relatively robust and the metal still has a good outlook while it gains market share from copper and zinc, it is the supply side of the equation that needs to be rationalised. This is likely to be difficult given that new capacity is on the way. Global aluminium stocks may be as high as 10-15 million tonnes so a huge supply deficit is needed to rebalance the market but this seems very unlikely. In 1994, when aluminium last faced such a glut, producing countries agreed a memorandum of understanding (MoU) that created a deficit and led to a drawdown of stocks to rebalance the market. But in today’s antitrust world, another MoU is probably out of the question, which means prices may have to bring about the adjustment. So apart from bouts of short-covering when funds roll positions and take profits, we expect aluminium to remain under pressure in 2016. For the first quarter we expect prices to trade broadly within a $1,450-1,560 range; for 2016 as a whole we expect an average of $1,500.
Production cuts help, but a lot more needed – China has cut aluminium capacity, perhaps as much as 4.9 million tonnes per year, but more new capacity has come on stream and more is on the way. China is also mulling the stockpiling of aluminium as a means to rebalance the market; whether that comes about remains to be seen. Outside China, Alcoa has cut significant capacity and Century Aluminium has reduced output at its Hawesville smelter to 40 percent of capacity. But cuts in the West seem illogical since the US and European markets face even bigger supply deficits, which in turn will encourage more exports from Russia, the Middle East and China: while more cuts are needed, they are needed in China. But it is unrealistic to suppose China will cut enough to create a big enough deficit. In November, global aluminium production averaged 162,100 tonnes per day (tpd); the average in the first 11 months 2015 was 159,000 tpd. The breakdown showed China produced 89,433 tpd, above the January-November average of 87,250 tpd but down from a peak of 91,867 tpd in June. The world ex-China produced 72,633 tpd in November compared with an average of 71,706 tpd in the first 11 months of the year – November’s reading was the highest for the year. Globally, production averaged 158,956 tpd in January-November, up from 144,980 tpd in the same period of 2014, so output in 2015 ran some 10 percent above the 2014 level while global consumption is thought to have grown by around 5.5 percent.
LME stocks down 1.3 million tonnes or 31 percent in 2015 – The downtrend in LME stocks continues. There have been bouts of inflow, normally ahead of LME prime dates, when shorts need to find metal to deliver against their positions but the overall trend is downward. A lot of the metal is believed to be heading into off-market financing deals. How much longer this continues will be an important factor for the market. If financing become less profitable, availability in the market should increase. If existing financing deals can no longer be rolled forward profitably, availability could increase sharply as could LME stocks. Perhaps this is why some warehouse companies have raised rents as much as they have, putting them in a position to offer incentives.
Prices – The downward trend in LME aluminium prices remains intact but they have found some support recently and SHFE prices are improving so some short-covering seems to be happening. This could provide support to prices in the near term but, given the overall fundamentals, we would find it hard to get bullish. We would expect these low prices will lead to more production cuts and a fairly balanced market, but for the stock overhang.
The forward curve is in contango, suggesting forward buying interest. Bouts of tightness in the nearby spreads highlights the need for shorts to borrow.
LME aluminium stocks are falling at a steady pace, averaging 5,200 tpd in 2015. Cancelled warrants as a percentage of total stocks stand at 37 percent.
Aluminium production remains elevated, with production cuts in China being partial offset by new capacity coming on stream.
Physical premiums have risen off the lows but lack upward momentum. Expect premiums to become more regionally diverse, with a pick-up in the US due to the local deficit.