Aluminum up on great expectations; reality lags behind

LONDON: Aluminum has staged an impressive price rally since the start of the month.
On the London Metal Exchange (LME) three-month metal CMAL3 has powered up to $1,900 per ton, a level last seen in October 2013.
That makes aluminum the third-best performer among the core LME-traded base metals, behind nickel and tin, both of which are trading off a bullish supply story in the form of Indonesia’s ban on nickel ore and the same country’s tightening grip on tin exports.
Aluminum is chasing its own bull narrative, one of accumulating production cutbacks pulling the global market into supply deficit after years of cumulative surplus.
That narrative has recently received some powerful boosts in the form of more cutback announcements by Western producers such as Alcoa and BHP Billiton and by Chinese aluminum giant Chalco.
The problem, though, is one of timing.
At an individual smelter level, it takes time to wind down production prior to mothballing or closure, meaning a lag between statement of intent, price reaction and actual cutback.
At a global level, this is an industry still struggling to turn itself around due to the historic momentum of capacity growth in the Middle East Gulf and in parts of China.
It is a problem all too evident in the latest global production figures from the International Aluminum Institute (IAI).
Despite some 1.6 million tons of announced capacity closures since the start of 2013, global reported output still rose by 3.3 percent to 11.75 million tons in the first quarter of this year. That represents a slowdown from last year’s growth of 4.3 percent, but only a marginal one.
Run-rates dropped in March itself but at an annualized 47.9 million tons they have increased by just over a million tons since December.
The growth momentum is still largely coming from China, where aluminum output rose by 10.2 percent in the first quarter.
There was a drop in run-rates in March itself, according to figures from the China Nonferrous Metals Industry Association.
But this conforms to an established statistical pattern at the start of any year, production apparently surging in February only to fall back in March.
Even allowing for that “normal” statistical quirk, annualized output in March of 23.4 million tons represented year-on-year growth of over 14 percent.
Which is not to say that Chinese smelters are faring any better than their Western counterparts. Indeed, Shanghai aluminum prices have lagged LME prices since the start of the year and many smelters are still struggling to stay afloat.
However, too few are giving up the fight, thanks in part to continued support from local governments, to compensate for the new generation of smelters ramping up in northwestern provinces such as Xinjiang.
The result is a chronically over-supplied Chinese market with stocks, both visible and off-market, rising and the price continuing to trade below the producer pain threshold.
Does Chalco’s announcement it is suspending some 600,000 tons of annual smelter capacity change things?
Well, obviously, much depends on whether the promise translates into reality. It’s fair to say the announcement has been greeted with a degree of skepticism, both in China and elsewhere. That’s because it’s still not clear whether a similar statement of intent last June, when it said it was cutting 380,000 tons of capacity, ever made much difference on the ground.
However, even if the cuts do materialize, and that may be a big “if,” they will not in themselves turn the Chinese aluminum supertanker around.
The country’s annualized production grew by just over 610,000 tons in the first three months of this year and more capacity is still being constructed. Analysts at AZ China consultancy assess the amount of capacity under construction with a 2014 completion date is around 3.7 million tons.
The dynamics of China’s huge aluminum smelter sector are now widely understood and the LME price (but not the Shanghai price) is disregarding continued evidence of surplus in China on the basis that prohibitive export taxes prevent that surplus from impacting the rest of the world. It’s an assumption, mind you, that requires a collective blind eye to be turned to the flow of aluminum manufactured products out of the country.
Perhaps more surprising than the continued growth in China is the fact that aluminum production everywhere else is creeping higher again.
Annualized production grew by 438,000 tons over the first quarter of 2014 and March’s ex-China run-rate of 24.5 million tons was the highest since August last year.
The impact of production cuts is clear to see in year-on-year comparisons in areas such as Eastern Europe, Latin America and North America (as shown in the chart above). But the effect has been more than offset by a renewed growth spurt in the Gulf region, where EMAL is firing up a new pot line at its Abu Dhabi smelter and the new Maaden smelter in Saudi Arabia is ramping up.
Gulf production rose by almost 14 percent in the first quarter, while annualized production of 4.5 million tons in March represented year-on-year growth of almost 18 percent.
True, some of the announced cuts are yet to take place, such as Alcoa’s closure of the Point Henry smelter in Australia (due to be completed in August) and of 147,000 tons of capacity in Brazil (due in the second quarter). It is in the very nature of commodity markets that they trade on expectations about the future. It’s just possible that the world outside of China is approaching a state of aluminum supply deficit, although the lack of independent statistical analysis in this market makes it very hard to say with any conviction.
LME stocks are not going to provide any clues, clouded as they are by the mass movement of metal to off-market storage for financing.
Which leaves production rates as the firmest statistical yardstick by which to measure any shift of fundamental dynamic. And right now, production is growing. In China it never stopped. It’s the renewed rise in output in the rest of the world that should give aluminum bulls pause for thought.
This is a market with great expectations. Reality may struggle to meet those expectations.

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