Aluminium surplus to balloon as producers resist output cuts

Aluminium surplus to balloon as producers resist output cuts

Reuters  | Mar 27, 2020 13:05

Aluminium surplus to balloon as producers resist output cuts

By Pratima Desai

LONDON (Reuters) - Plummeting aluminium prices due to the impact of the coronavirus outbreak on demand are unlikely to persuade producers to immediately cut output as input costs have also fallen, leaving the market with massive surpluses.

Re-starting mothballed plants take a long time and comes with a high cost, and smelters typically avoid closing them even if in the short term they are losing money.

Up to 40% of aluminium smelting costs are accounted for by electricity, which has followed oil prices lower.

(GRAPHIC: Aluminium vs electricity prices - https://fingfx.thomsonreuters.com/gfx/ce/7/9239/9220/Aluminium%20%20prices%20vs%20electricity%20prices.png)

The remaining components include carbon and alumina, whose prices have also fallen. While the drop in input costs has supported smelters' margins, it has also helped push aluminium prices to 4-year lows.

Benchmark aluminium on the London Metal Exchange, at $1,530 a tonne, has tumbled more than 15% since Jan. 22. Much of the drop came even before the lockdown in top producer and consumer China, where the coronavirus has devastated the economy and demand.

"Prices have to be low for a long time before a smelter will consider shutting down. In the first instance they will try to cuts costs, and one way to do that is stop maintenance," Edgardo Gelsomino, head of aluminium research at Wood Mackenzie.

Wood Mackenzie expects to see a surplus of at least 1.5 million tonnes this year compared with a deficit previously.

"There will be production shutdowns this year, but the bulk of cuts will be next year and the biggest adjustments will be in China, where most producers are losing money," Gelsomino said.

China accounted for more than 55% of the nearly 69 million tonnes of metal produced last year, according to data from the International Aluminium Institute (IAI).

IAI data also shows Chinese aluminium production up 3.7% in February from the same period last year.

Chinese producers are at the high end of the cost curve for producing aluminium, alongside Australia and Europe.

"Aluminium-producing countries such as Russia, Canada and Norway also produce oil. When the oil price falls, their currencies depreciate against the dollar and that results in lower costs," said CRU analysts Lais Santos.

Alcoa (N:AA) and Rio Tinto (AX:RIO) (L:RIO) are major aluminium producers in Canada, Norsk Hydro (OL:NHY) in Norway and Rusal (HK:0486) in Russia.

Weaker local currencies in countries such as Canada cut labour bills and the price of materials bought locally in terms of dollars, in which aluminium is priced.

CRU forecasts a 4 million-tonne surplus this year and expects aluminium demand to shrink by 7.9%.

Much of that drop is because of the auto sector, where sales and production have plunged.

(GRAPHIC: China auto sales vs aluminium - https://fingfx.thomsonreuters.com/gfx/ce/7/9236/9217/China%20auto%20sales%20vs%20aluminium%20price.png)

"The collapse in demand which was seen in China is set to be repeated globally, and to date the full impact of this is yet to be felt in physical markets," Citi analysts said in a note.

Citi expects aluminium prices to drop to $1,450 a tonne in the short term, sees a 2.7 million tonne surplus this year and forecasts a 6.2% global demand decline.

(GRAPHIC: Aluminium balance - https://fingfx.thomsonreuters.com/gfx/ce/7/9235/9216/Aluminium%20balance.png)

Some of the surplus for this year is already finding its way to warehouses monitored by the Shanghai Futures Exchange, where inventories at 528,072 compare with levels below 189,000 tonnes at the start of the year.

In LME approved warehouses, stocks at 1.13 million tonnes have climbed more than 10% since the middle of March.

(GRAPHIC: Aluminium stocks - https://fingfx.thomsonreuters.com/gfx/ce/7/9237/9218/Aluminium%20stocks.png)

Expectations of surpluses to come can be seen in the discount for the cash against the three-month contract on the LME, which has tripled to more than $30 a tonne in early March.

© Reuters. FILE PHOTO:  Employees work at the production line of aluminium rolls at a factory in Zouping

(GRAPHIC: LME cash vs three-month aluminium - https://fingfx.thomsonreuters.com/gfx/ce/7/9240/9221/LME%20cash%20vs%20three%20month%20aluminium.png)

Related News

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Discussion
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (India) English (Canada) English (Australia) English (South Africa) English (Philippines) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
NoYes
CancelYes
Saving Changes

+

Download the Investing.com App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.

Investing.com is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.

';