Commodity Analysis

Aluminium - Gloomy short term

Seetharaman R | Updated on January 17, 2018 Published on August 21, 2016

Yulia Grigoryeva/

Uncertain global growth outlook and increasing supply from China should keep the prices depressed

Aluminium prices may remain weak for the remaining part of the year. Though, prices have moved up by about 12 per cent year-to-date on China-led demand growth and the country closing down some of its production capacities, there is no driver for a sustained up-move in the metal in the short term.

The metal quotes at $1680 per tonne now in LME.

Over the next six months at least, as developed markets remain fragile and China’s stimulus-led demand loses steam, aluminium prices may remain weak. Also, as China is expected to add facilities producing low cost aluminium, prices may only slip from here.

Of the global production of 57.9 million tonnes of aluminium in 2015, China’s share was 31.7 million tonnes. The country uses up most of its production domestically.

Long term investors may however find some value in the metal even at current prices. The increased usage of aluminium and its alloys in automobile sector in US, Europe and China, as more cars are produced to meet stricter emission standards, is expected to boost demand for the metal in the long term.

Weak global demand

International Monetary Fund forecast of a global GDP growth rate of 3.6 per cent in 2016 was shaken by the economic and financial market risk created by Britain’s unexpected exit from the European Union. The doubts on economic growth and financial market ripples caused because of this event continues to linger in the minds of the investors. The inability of advanced economies including England, Japan and US to reach its inflation targets and stimulate aggregate demand in its economies continues to be a cause of worry. The inability of OPEC to stabilize crude oil production to keep a check on prices adds to the global deflationary woes further.

The uncertainty is reflected in US Aluminium production. According to ‘The Aluminium Association’, production in US for the first seven months of 2016 was close to 5.1 lakh metric tonnes, far lower than the 9.6 lakh metric tonnes production during the same period in 2015. The weak global Aluminium prices coupled with the economic uncertainties have bought down production in US.

China supply dynamics

Rusal, a major Russian Aluminium producer says, this artificially low price is because of the unsustainable State subsidized production practices by Chinese manufacturers. At a prices around $1550 per tonne, more than 35 per cent of the China’s production capacities were operationally loss making.

Chinese manufacturers’ continuing addition of new production capacities in the interior parts of North-Western provinces at a lower production cost by the use of captive power plants is expected to increase global Aluminium supply further over the next year. Malaysia and Australia replacing Indonesia as top exporters of Bauxite to China should stabilize long term bauxite supply to Chinese manufacturing plants. Earlier, in 2014, Indonesia had banned the export of Bauxite. According to ‘International Aluminium Institute’, China monthly production of Aluminium increased 6 per cent from December 2015 to June 2016 compared to the total global Aluminium production increase of 1.3 per cent.

The 21st CRU world Aluminium conference in May 2016 raised concerns of the global inventory overhang that might be created by the new Aluminium manufacturing projects in China. They expect China to produce 80 per cent of the total global production by 2018. With high cost capacity plants not closing at the expected rate and a possible domestic demand slowdown in the second half of the year, the fear of global inventory overhang created by new projects is expected to push prices lower.

Auto Demand – Long term

But the long term demand outlook continues to be positive. Around 50 million new passenger car registrations and around 15 million commercial vehicle registrations for 2015, that accounted for almost 70 per cent of the global market, were from US, China and Europe. According to Rusal, the demand for Aluminium from transportation and construction sectors constitutes close to 50 and 20 per cent of the global demand. The demand for Aluminium from transportation segment is expected to grow at a long term annualized growth rate of 7 per cent per annum followed by construction around 4 per cent per annum.

Aluminium and Aluminium alloys are replacing heavier parts in the automobile units due to the metals improved ability to decrease emissions. The use of light weight Aluminium in cars is expected to increase from 150 kg now to 250 kg by 2025, thus reducing vehicle’s emission close to 20 per cent from the current levels. This should keep the long term demand for Aluminium healthy. Other than these two segments, demand for aluminium is driven from sectors such as machinery, packaging, construction, power & electronics also.

Published on August 21, 2016

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