UC RUSAL sees strong factors supporting bullish trends in aluminium

UC RUSAL, a leading global aluminium producer, presents its overview of the aluminium market trends. A number of influential factors that have emerged in recent weeks cause the Company to become increasingly bullish about the near term prospects for the aluminium price and UC RUSAL believes a convergence of physical and technical factors are now causing a realisation amongst industry participants and investors that the price is undervalued.

Supply demand balance
As the Company has previously highlighted, the market is forecast to record a deficit of approx 1.2 million tonnes in 2014 and a further 985kt in 2015. The current forecast includes expansions at EMAL (EGA), Ma'aden and Press Metal as well as the ramp up of projects in India. Beyond 2015, RUSAL sees limited opportunities for capacity additions outside China since no new projects are on the drawing board for imminent development and the industry remains under-invested.
Within China, RUSAL sees 2013 demand of 25.5Mt broadly equal to production, and growing by approximately 10% in 2014. Capacity additions of approx 2.4Mt that, according to the Company’s estimates, have been introduced in 2014 year to date have been offset by 2.1Mt of capacity closures due to uneconomic smelter operations. Overall the Company expects the Chinese market to be broadly balanced whilst the SHFE price will remain depressed by the overhang of 4Mt of idle capacity.

Impact of Indonesian ore export ban
In the 2013, more than 4Mt per month of Indonesian bauxite was shipped to China and is the basis for 10Mt of annualised aluminium production (20% of global production). This has fallen to only 4Mt year to date in 2014. Whilst the Company understands that Chinese refineries may have accumulated stocks of up to nine months worth of supply, it is inevitable that alternative sources of lower grade, higher cost bauxite (up to 30% more expensive delivered cost to China than Pacific Rim origin) will be required to maintain the same level of alumina production further pressuring the competitiveness of Chinese refineries and smelters.

Stocks
The stock trends through 2014 clearly support the view that the market is in significant deficit, with LME stocks falling by over 260kt since the start of the year. LME stocks are at the lowest level in 13 months and the level of 'on warrant' is the lowest in five years.
The lack of deliveries to warehouse are the most telling, with no deliveries into Detroit since early March and only Vlissingen receiving metal since April.

Price dynamics
Current trading activity on the LME can be interpreted as very supportive for aluminium in the short term. Taking a closer look at trading throughout the past three days, the technical resistance at $1,850/mt was very strong and is part of a long term down trend that was last tested in April at $1,900/mt.

In summary, a combination of physical factors (supply and demand balance, Indonesian bauxite story, out of the money smelters in China, persistent draw down in LME stocks) as well as constructive pricing factors (narrow contango, breaching long term technical resistance levels) causes RUSAL to assert that aluminium is entering a new bullish phase that could see prices tested at $1,900/mt this week and potentially $2,000/mt during the next few months.

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