China¡¯s Aluminum Producers Seen Having to Make Cuts Amid Surplus

China, the world’s largest producer of aluminum, will have a “manageable” surplus of the metal for the next five years if companies cut back 4 million to 5 million metric tons of production, according to researcher CRU.

China has cut output 1 million metric tons this year and will probably reduce it 2 million tons by 2015, with about 24 million tons produced this year, according to Marco Georgiou, an analyst at CRU in London. Aluminum fell 3.8 percent this year in China and 10 percent in London.

“It will be manageable surpluses only if curtailments of around 4-5 million tons are implemented over the next five years,” Georgiou said by e-mail yesterday. “This is based on demand growth stabilizing in the high single digit level and that smelters continue to ramp up in the northwest.”

Global aluminum production will climb 5.5 percent this year to 50.8 million tons, exceeding demand by 1.2 million tons, according to Barclays Plc. China accounted for 43 percent of production and 43 percent of consumption last year, according to the bank.

Aluminum for August delivery rose 0.2 percent yesterday to 14,545 yuan ($2,368) a ton on the Shanghai Futures Exchange. Prices should stay at about 15,000 yuan a ton over the next one to two years, spurring cutbacks, Georgiou said.

Chinese aluminum capacity and production have more than doubled since 2005, according to Morgan Stanley. The aluminum market had an estimated glut of 900,000 tons last year, the sixth consecutive year of surplus and will be oversupplied until at least 2018, according to the bank.

Losing Money

About one-third of Chinese producers are losing money at current Shanghai prices, according to London-based CRU. Production equaling 4.6 million tons in the world excluding China is currently operating at a loss, according to Georgiou. Prices have failed to spur aluminum producers to permanently curtail supply, Morgan Stanley said in a report last month.

Production cuts announced by aluminum producers are “still not enough,” Oleg Mukhamedshin, deputy chief executive officer of Moscow-based United Co. Rusal, the world’s largest aluminum producer, said at a CRU conference in London on May 15.

“Why is this production still operational?” Georgiou said at the conference. “Some of them have a strong importance to their domestic economies and it’s the reluctance of governments to allow these smelters to close.”

About 28 percent of European Union aluminum capacity is breaking even at current prices in London, according to Citigroup Inc. After including premiums to prices on the London Metal Exchange, about 25 percent of European smelting capacity is not breaking even, Citigroup analyst David Wilson said at the conference.

Aluminum Premiums

The premiums buyers are expected to pay for aluminum in Europe are $260 to $290 a ton in Rotterdam, including duty, according to Harbor Intelligence. The charge in the U.S. is 11.45 cents to 12 cents a pound, Jorge Vazquez, managing director at Austin, Texas-based Harbor, said by phone on May 16.

“The reliance on high physical premiums makes the industry incredibly vulnerable,” Wilson said. Labor and energy costs have put European aluminum companies at a disadvantage with Spanish smelters the least productive in Europe, he said.

Premiums will stay high until so-called financing deals break down or delivery backlogs at warehouses approved by the LME are reduced “significantly,” Eoin Dinsmore, a consultant at CRU, said at the conference on May 14. CRU expects financing deals will probably start to end in 2015.

Aluminum for delivery in three months fell 10 percent to $1,856 a ton this year on the LME. Stockpiles in LME-approved warehouses climbed to a record 5.24 million tons in December and are now 5.239 million tons.

“Having a balanced market after six consecutive years of surpluses and having this balanced market in a context of unprecedented inventory levels doesn’t really change the situation,” Harbor’s Vazquez said by phone yesterday. “We will need a structural change that translates into a meaningful reduction in inventory levels and a meaningful deficit for the psyche of the market to change.”

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