Ex-China Aluminum output hits lowest in 3.5 years on cuts

Base metals have been dragged lower in what appears to be a commodities-specific sell-off, while equities, including metals and mining equities, are holding strong. With LME inventories for most base metals either flat or falling, Chinese demand surprising to the upside, and market balances tightening, the recent move in base metals prices has little to do with fundamental signals, said Barclays Capital in a research note.

As such, we caution against getting too bearish on the sector at these levels. Nickel and aluminium prices have sunk to close to the year’s lows and we see limited downside from here. Prices for these metals are already eating so far into industry cost curves that production cuts are beginning to address surpluses, and in the case of aluminium, are close to moving the market into a deficit, they added.

In the aluminium market, the International Aluminium Institute (IAI) released its global production data. These data continued to show significant divergence in output trends between China and the rest of the world. For the world ex-China, production fell by 3% y/y and 2% m/m to 65Ktd, (which followed September’s 1% y/y contraction). This is the lowest monthly daily production rate since February 2010 and demonstrates the ‘real’ effect from announced production cuts made over the past 18 months.

On a regional basis, weakness in October output levels can be seen particularly in, Russia (-14% y/y), Latin America (-9% y/y) and North America (-4% y/y). This contrasts with Chinese production performance in October with output rising 14% y/y (5% m/m) to a record output level of 65.7Ktd (24Mty annualised).

This is driven, in large part, by a continued ramp-up of new capacity in Xinjiang province. At a global level, the strength of Chinese production growth was enough to offset the RoW contraction, driving output up 4.4% y/y to 136Ktd. It is, however, noticeable that global output has fallen modestly from the record daily output rate of 139Ktd in February, pointing to RoW contraction starting to hold sway over Chinese growth.

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