Commodities | Nov 05 2015
– Ex-China production cuts insufficient
– Chinese production cuts not anticipated
– Stockpiles continue to grow
– Demand growth healthy but insufficient
By Greg Peel
Alcoa has announced it will cut 503ktpa of its aluminium smelting capacity in the US and 1.2mtpa of its alumina refining capacity. The cuts will involve idling facilities that are loss-making at current aluminium/alumina prices.
The cuts represent a reduction of 47% of the company’s US-based aluminium capacity, 14% of the company’s global capacity and 24% of total US aluminium capacity, along with 50% of the company’s alumina capacity, 7% of its global capacity and 21% of total US alumina capacity.
As a result, the price of aluminium rallied on the London Metals Exchange on Tuesday night. However, Morgan Stanley is quick to point out that the rally can be put down to sentiment rather than any material reduction in the global oversupply of both commodities. While the production cuts appear significant in terms of Alcoa the company and total US capacity, they still only each represent a 1% reduction for the net global market.
The real problem lies in China.
Aluminium prices have been trending lower since May and any attempts to rally in the interim have proven short-lived. Trading around US$1500/t, the aluminium price is “well into the cost curve”, Sucden Financial notes, meaning a large chunk of global capacity is operating at a loss. Yet the seven months to July saw 158,086t per day of aluminium being produced, up from 143,300t per day over the same period 2014. A cut in net production now would still have limited immediate effect, Sucden suggests, given global stocks are so high.
Only were there to be a meaningful cut in global production and a subsequent reduction in stockpiles would the aluminium price stand a chance of rising. There is some hope, in that Chinese exports were 34% higher in the period to August 2014 over the same period 2013 but this year are up only 22%. If the trend continues, the world ex-China would soon find itself in a production deficit which would then lead to stockpile reductions, Sucden suggests.
Problem is, if the aluminium price does start to rally as a result, Chinese exports would simply pick up again. Already, notes Morgan Stanley, smelters in the US, Europe and India have called for restrictions on Chinese imports, accusing the Chinese of “dumping”. The Chinese industry body has denied such allegations.
Credit Suisse cites Chinese data suggesting as much as 95% of Chinese production is loss-making.
It is thus no surprise China announced in September an intention to cut 2.4mtpa of capacity. But just when the metals markets thought the tide may finally be turning, last week the government announced a reduction in on-grid power tariffs.
In October, Chinese aluminium giant Chalco announced the full closure of its 500ktpa Liancheng facility. Last week Chalco received a new deal from the local government which reduces Liancheng’s power tariff by a third. The company has since reversed its decision to close the facility.
It is clear that China’s target of 2.4mtpa of capacity cuts is unlikely to be achieved, Morgan Stanley laments. And even if targeted cuts do take place, they will be more likely outweighed by growth elsewhere. The broker expects Chinese smelter production will increase by 11% in 2015 and a further 6% in 2016.
There is no issue with the aluminium demand-side of the equation. Aluminium has one of the fastest growing demand profiles among the metals and Sucden expects this trend to continue and even expand. But for the current level of global supply to be absorbed, a significant step-up in demand would be needed.
China should provide some level of demand increase, given increasing investment in the country’s power grid, and improving property market and a reduction in tax on auto sales intended to revive flagging auto sale growth. But “substantial and sustained growth is needed,” Morgan Stanley warns, and until this is apparent the broker’s price forecast remains to the downside.
Morgan Stanley is not alone.
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