Aluminum Deficit Grows But Upside Still Has Limits

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Includes: FOIL, JJU
by: MetalMiner

By Stuart Burns

No one would disagree that the aluminum market is finally in deficit.

Demand has remained robust and production, at least in the real world outside of China, has continued to be constrained. The World Bureau of Metal Statistics (WBMS) reported a market deficit for primary aluminum for January to October 2014 was 542,000 tons which follows a surplus of 570,000 tons recorded for the whole of 2013. Demand for primary aluminum in the first 10 months of 2014 was 41.43 million tons, a whopping 2.212 million tons more than the same period in 2013.

Yet, according to the WBMS, production in January to October 2014 rose by only 1.398 million tons compared with the first 10 months of 2013, mostly from China and new middle eastern sources, as western and Russian plants continued to either be shuttered or face closure due to production problems.

Resource Investing News, quoting Reuters sources, said aluminum production has been falling outside of China since 2012, having declined by 1.61 million tons over that period of time. From the start of 2012 we saw very low aluminum prices, which led producers to cut their output considerably. Production is still falling in South America, largely the result of conditions in Brazil, where high power prices and low aluminum prices have made the country's once-significant aluminum industry not economically viable.

Meanwhile, total reported stocks continued to fall and at the end of October were 6.564 million tons compared with 7.171 million tons at the end of 2013. Reported stocks, though, are only part of the equation and have always been the elephant in the room as far as the aluminum market is concerned. To what extent these visible stocks have simply moved into invisible, off-market inventory is difficult to tell even for research organizations such as the WBMS.

Overall, however, Reuters is of the opinion that there is no reason for production to fall further in the year ahead, RIN reported. Instead, a steep rise may occur in 2015 as companies look to restart smelters that have been closed since 2012. Smelters are effectively achieving something around $2,400 per metric ton for spot sales, a level that all of them should be able to make money at.

Aluminum's fortunes depend crucially on two major supply sources continuing to be constrained, the first is the 5-8 million tons of material sitting in inventory in long-term financing deals, the very presence of which has depressed the London Metal Exchange Price while spurring the physical delivery premium. Secondly, Chinese supply, which has remained locked behind high export tariffs but manifested itself in a rising tide of semi-finished exports from the country, that is, on the whole, not subject to export tariffs. The article's consensus seems to be that the price for 2015 will be as much as it was in 2014, a range between $1,850 and $2,150 per metric ton. What interests consumers and producers alike, though, is not the LME but the delivered price including the physical delivery premium. That looks likely to remain firm, possibly even higher than Q1 2015 levels, and suggests that a delivered price of $2,500-2,600 per metric ton is likely.