Aluminium prices hit by mounting China demand concerns

Aluminium prices tumbled to six-year lows on Wednesday, October 28, as traders fretted about the likelihood of large surpluses this year and next and the lack of substantial output cuts to balance the market.

Benchmark aluminium on the London Metal Exchange (LME) slumped to $US1460 a tonne in early trade, its lowest since June 2009. It later recovered to close at $US1484 on Tuesday.

"Aluminium's fundamentals are extremely challenging, we haven't seen anyone really seriously cutting back production," observed an industry analyst. "Problem is they are all waiting for someone else to do the decent thing."

A latest survey conducted earlier this month showed analysts on average expect the aluminium market to have a surplus of 815,000 tonnes this year. The range of forecasts was from 440,000 tonnes to 1.617 million tonnes. Global aluminium consumption this year is estimated at about 54 million tonnes.

The root cause of the oversupply is China, which has some of the most modern and lowest-cost smelters in the world. China also has many higher-cost plants, which are probably losing money but continue to churn out large amounts of aluminium.

A report this month on the website of the China Nonferrous Metals Industry Association that Aluminum Corp of China (Chinalco), the country's top aluminium producer, plans to shut its biggest smelter is being treated with scepticism.

Russia's United Company Rusal reaffirmed that it is reviewing some of its operations. But the world's top aluminium producer churned out 916,000 tonnes in the third quarter, up 1 per cent on the previous three months. For the first three quarters, production edged up by 1.4 per cent to 2.7 million tonnes.

"Rusal have said that before, but why would they cut? The rouble is weak," one trader said. "Aluminium prices have fallen, but they are getting more roubles for every dollar. Their costs are in roubles."

Negative sentiment towards aluminium is clearly evident. Latest estimates show the speculative short in aluminium grew by 45,000 lots week on week to 158,000 lots, or 27 per cent of open interest.

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