Lower crude prices are a bane for aluminium

It has been a volatile year for aluminium. But the light metal managed to be amongst the gainers as the world’s biggest producers announced production cuts.

Global supplies finally appear to be turning into a deficit after years of structural surplus, on back of accumulating capacity closures.

Russia’s Rusal cut its production by eight per cent in 2013 and by a further 12 per cent y-o-y in the first quarter this year to the annual capacity of 883,000 tonnes.

Alcoa, another major producer, cut its production to 551,000 tonnes this year and has permanently closed about 30 per cent of its global aluminium smelting capacity over the last five years.

Along with supply cuts in place, prices got a further boost as consumption rose 6 per cent to 27 million tonnes in the first half.

It is expected to grow over the next four years as auto makers such as BMW, Ford and Mercedes use more aluminium in cars and strive to design a new generation of lighter, more fuel-efficient vehicles with reduced life-cycle emissions.

Premiums in international market are high due to lower availability of floating stock with premiums in the US ruling at over $500 a tonne.

In Europe, the level is a bit below $500, while in Japan premiums are at about $420.

The stocks on the London Metal Exchange are getting offloaded in line with demand.

But that may take a while as owners of stocks are likely to keep holding them in anticipation of further rise in premium. All these factors made aluminium the biggest gainer till October.

However, the rally was halted as slumping oil prices signalled lower costs to produce the energy-intensive metal, thereby putting pressure on aluminium prices as well.

Although crude is not the primary source of energy for the aluminium producers, energy accounts for about 30 per cent of output costs and falling oil prices may have a deflationary impact.

Further, putting pressure on prices was rising aluminium stocks held at three major Japanese ports for the seventh consecutive month, hitting a 5-1/2-year high at the end of October as demand fell and the world’s third-largest economy unexpectedly slipped into recession.

Aluminium stocks held at the ports of Yokohama, Nagoya and Osaka rose 6 per cent in October from a month ago to 332,200 tonnes, the highest since March 2009.

The inventory increase also reflects slowing demand elsewhere in Asia owing to expanded export of cheaper products from China to countries such as Vietnam and Indonesia, which helping reduce demand for refined metal in the region.

Bauxite mines are springing up in Malaysia and shipping ever-increasing amounts of the raw material used for aluminium to China, helping fill a gap since Indonesia banned ore exports in January 2014 in a bid to encourage value-added processing at home. China will need around 130 million tonnes of bauxite in 2015 to feed its fast-growing aluminium industry and must import about 36.8 million for its domestic consumption.

Although Malaysia supplied 1.27 million tonnes to China in the first nine months, that was 12 times more than the 105,000 tonnes shipped in the same period a year ago. Malaysia could prove critical for China’s producers as they scout out alternatives to Indonesian supplies.

For the year 2015, the price trend is likely to be positive as Chinese producers are very dependent on Indonesian bauxite, which is in scarce supply.

Next year (2015), it will become a serious concern as smelters run short of bauxite.

Also, global aluminium demand is expected to grow by over 5 per cent in 2015 and 2016, led by a solid recovery in the US economy and steady growth in emerging countries.

The aluminium market is expected to tighten significantly next year to show a 102,500-tonne deficit, from an earlier estimation of a 4,444 tonne supportive for the metal prices.

In 2015, aluminium prices in the international markets (CMP: $1,853/tonne) can inch higher towards $2,340, while MCX aluminium prices (CMP: ₹117.5/kg) can possibly head higher towards ₹145.

The writer is Associate Director – Commodities & Currencies, Angel Broking Pvt. Ltd. Views are personal.