Portfolio

Aluminium prices under stress on excess supply

Arvind Jayaram | Updated on March 23, 2013 Published on March 23, 2013

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Aluminium prices are unlikely to bounce back in the near-term as capacity surpluses continue to exert downward pressure, despite major global producers resorting to cuts. From a medium-term perspective, a dip in automobile purchases amid renewed economic uncertainty in Europe and a slowdown in imports by China are expected to result in demand growth deceleration over the next few years.

Aluminium smelters globally are expected to operate at 84 per cent capacity in 2013, with production pegged at 47.6 million tonnes (mt) during the year, as against capacity of 56.9 mt a year. This translates into greater curtailment of production than in 2012, when production stood at about 46.2 mt from operational capacities amounting to 54 mt a year. In addition to primary aluminium, recycled metal accounts for around one-third of global consumption.

7% growth likely

Demand is expected to mount to 49.4 mt in 2013, a 7 per cent growth in comparison with the previous year, according to a projection made by aluminium giant Alcoa. Most of the demand will come from China, the world’s biggest consumer, which is expected to witness 11 per cent growth in consumption to 23 mt.

But China is well on its way to becoming self-sufficient in aluminium, with the country limiting itself to strategic imports of aluminium, thanks to massive capacities built at home, even though it still relies on overseas suppliers for its bauxite requirement. This makes it imperative for global producers to explore and develop new markets for their produce.

Among the other top aluminium consuming regions, Indian demand is expected to rise by 7 per cent to 3.8 mt in 2013. The country’s aluminium industry comprises four primary producers, namely Hindalco, Nalco, Balco and Vedanta Aluminium. The cumulative capacity of these firms amounts to around 1.6 mt.

Demand from Europe, on the other hand, is expected to decline by 1 per cent to 6.5 mt, even as North American consumption is projected to rise by 4 per cent to 6.2 mt.

Still in woods

Primary aluminium prices never recovered after the crippling global recession in 2008. Prices of the metal touched an all-time high of $3,271.3 a tonne in November 2008 before crashing to a five-year low of $1,251.8 a tonne in February 2009. The metal managed to claw back much of the lost ground in subsequent years, but has fallen 32 per cent since April 2011. And since the start of 2013, aluminium prices have tanked by 9 per cent on the LME.

The metal has been trading in a range between $1,787 and $2,200 a tonne on the LME over the past one year. It is currently trading at $1,895/tonne. The short-term trend is weak, but the metal is nearing the support level. A similar trend is seen on the MCX, where the short-term trend for the metal is down, but it is close to the important support level of around Rs 100/kg. If it breaches this key support, its decline could accelerate going forward.

Aluminium finds use in a range of sectors, with the transport industry accounting for around a quarter of demand (27 per cent) and the construction business a fifth (20 per cent). It is also a key input for the packaging industry, which consumes 15 per cent of global aluminium production to fabricate cans and tins, among other packaging articles. The electrical sector and machinery and equipment industry account for a 10 per cent and 8 per cent share of global aluminium demand, while the consumer durables industry is responsible for 7 per cent of consumption.

arvind.jayaram@thehindu.co.in

Published on March 23, 2013
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