Commodities | Aug 10 2016
While the prices of many base metal are pushing higher, aluminium remains in the doldrums and ANZ analysts suggest a large surplus is looming.
-Aluminium production picks up strongly as earlier capacity closures are nullified
-Prices unlikely to rise above US$1,700/t on a sustainable basis
-Record levels of Chinese aluminium exports flagged
By Eva Brocklehurst
While the prices of other base metals are being pushed higher, aluminium is underperforming. ANZ Bank analysts suggest the benefit is ebbing from capacity closures heralded at the start of the year and production has picked up strongly in recent weeks.
A quickening pace of capacity re-starts in China is expected in the second half and there is also the ramp-up of production capacity in India and Malaysia to consider. Hence, the analysts suspect the market may be pushed further into surplus.
Aluminium prices are expected to underperform the rest of the base metals sector in the second half of 2016. The analysts maintain an end-of-year target of US$1,660/t and do not envisage prices staying above US$1,700/t on a sustainable basis until 2018.
The improvement in the base metals sector has been led by nickel, supported by strict new environment laws which have forced the closure of several mines in the Philippines. Moreover, better economic data in China has improved investor sentiment. The analysts note that the industrial sector has recovered and production expanded by 6.2% in the year to June, above consensus forecasts for 5.9% growth.
A slightly weaker US dollar has also underpinned base metal prices recently, as expectations for a rate hike in the US have diminished. Nonetheless, aluminium has been the laggard in the complex. The analysts blame the build up in smelting capacity in China over the past five years which has pushed up the surplus.
Record levels of Chinese aluminium exports have occurred and, over the past three years, exports of primary aluminium and products increased 35% to around 400,000 tonnes per month.
China announced the curtailment of around 4.5mt of capacity earlier this year but recent data suggests the closures of late 2015 have been reversed. The analysts calculate nearly 200,000 tonnes of capacity re-started in the June quarter with a further 400,000t due in the September quarter.
Furthermore, the economic backdrop to this surge in production remains clouded, the analysts maintain, in that recent data suggests China’s growth momentum is fading and the property sector appears to have peaked. This suggests that tightening measures by policy makers are having an impact.
Meanwhile, International Aluminium Institute data signals production in North America continues to contract sharply. June output fell 11% to its lowest monthly level since March 1983. Smelter closures in the US have reached 1mtpa of capacity since mid 2015.
The analysts also maintain that the fall in inventories on the London Metal Exchange is not reflecting the weakness in the market, with the change to warehousing regulations playing a big part in the fall. All up, the accelerated Chinese production and exports should lead to greater availability of the metal globally and combine with a build up in inventory in Asian warehouses as Indian producers ramp up.
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