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Weak demand outweighs aluminium output cut

G. Chandrashekhar

MUMBAI, Aug. 12

THE negative impact of weakening demand for aluminium is outweighing the bullish impact of production cuts. With demand weakness spreading around the world, a downside for prices in the near-term seems imminent.

In its latest Commodities Forecaster, Macquarie Research Metals and Mining said at 19.6 million tonnes, the global aluminium market was close to balance in 2001, but a deficit was likely in 2002 when demand projected at 20.3 mt may outstrip supply estima ted at close to 20 mt. However, due to demand downgrades, the risks of a massive spike in prices may be lower than previously thought.

Latest data and anecdotal evidence from the US and Asia indicate that demand has deteriorated by more than previously anticipated, the report pointed out, adding that aluminium demand in the US fell at double-digit rates in the first quarter, while deman d in Japan was worsening with each month. Even in Europe where some strength was seen at the start of the year, demand was rapidly turning down.

The number one issue for the aluminium market remains the timing and the extent of any turnaround in demand. When demand begins to improve, prices will surely recover, and will turn around rapidly, according to Macquarie Research. ``With much of the idle d smelting capacity likely to remain off-line for at least the next two years, there is still a high risk that the market will move into significant deficit in 2002,'' the report pointed out.

One area which has become more of a concern, and which has put a serious dent in the more bullish views of the market is the growth in Chinese aluminium production (+ 15 per cent year-on-year in the first four months of 2001) and the plans for further ra pid expansion over the next few years. If prices rally strongly, Chinese production and exports are expected to respond rapidly, making any rally above $1,800 a tonne fairly short-lived, the report said.