Alcoa¡¯s aluminium demand revision a worry for Indian producers

Aluminium prices rose for a while in the March quarter but gave up most of those gains towards the end of the quarter. Here comes more gloomy news. Aluminium producer Alcoa Inc. said global demand for aluminium will grow by 5 per cent this year, instead of the 6 per cent it had forecast in January.

The main culprit is China—accounting for 52 per cent of global aluminium consumption—whose demand is set to grow by 6.5 per cent compared with the 8 per cent earlier. Ex-China demand too is expected to grow by 3 per cent compared with 4 per cent earlier.

These estimates may change in future but the direction indicates lower growth. The aerospace and the heavy-duty truck/trailer segment (in the US) are the main sectors where demand is lower.

If companies cut supply too, then the balance can be maintained. Indeed, supply is lower but not enough to offset lower demand growth. As a result, the deficit (excess of demand over supply) is now lower, projected at 1.05 million tonnes (mt) compared with 1.23 mt earlier.

Lower demand growth forecasts coincide with a period when aluminium prices have trended down.

The news on the metal premium front, paid by buyers for timely delivery, was mixed in the March quarter. Premiums in Europe were down by 11.7 per cent and by 2.2 per cent in the US but were up by 25 per cent in Japan.

Aluminium shares have done well in the past three months, partly on expectations that higher realizations and lower costs are likely to benefit companies. There is room to be cautious.

India Ratings and Research Pvt. Ltd had noted in its March note that in FY17, “low capacity utilization and higher imports to offset the benefits of price recovery and the lower cost of production on operating margins”

Alcoa’s expectations of a lower deficit increase the prospects of higher imports, as India’s demand outlook is stable, unless the government steps in with a minimum import price protection for aluminium as well.

Of course, if lower demand causes a fall in aluminium prices, that will only add to their woes.

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