UNITED STATES December 02 2013 7:19 AM
NEW YORK (Scrap Register): Long perceived as structurally over supplied, the aluminum market has finally turned a corner, we believe, with the pace of supply rationing ex-China enough to drive a small, but nonetheless significant, global market deficit in 2014, said Barclays Capital in a Research note.
According to Barclays, long-term fundamental trends in commodity markets often attract the label of structural states of being – namely apparent unchangeable aspect of market dynamics. There is no better example of this than aluminum, which over the past five years has been generally described as being “structurally over-supplied”. However, we believe the market is now turning a corner with the aluminum market ex-China having fallen into deficit in 2013 and that deficit set to get bigger in 2014. Provided producers go ahead with all the production cuts that have been announced, the global market balance will shift into a small 275Kt deficit next year – the first since 2006-07 – substantially tighter than the 1.2Mt surplus we forecast back in mid-2013.
The critical shift in fundamentals has come on the supply-side ex-China. The LME warehouse rules proposed in July 2013 (and confirmed in November) catalysed a near 15% drop in US and European physical premiums. Combined with a similar fall in LME prices since the beginning of the year, an additional 1.7Mt smelting capacity ex-China fell into loss making territory on top of 1Mty capacity already in such a state at the beginning of the year. Subsequently, as Figure 1 demonstrates, between July and November 2013, 1.4Mty of production curtailments were announced. The IAI data have already started to show some impact, with output ex-China falling 3% y/y to the lowest level since February 2010, although the full impact from closures will not be fully felt until next year.
The obvious question in light of this fundamental story is whether there is a bullish case for prices? In the context of 2014, we forecast an average price of $1,838/t, which infers a very similar range-bound price dynamic to this year. Given 4.5Mt of metal in LME warehouses and a minimum 2Mt held off-warrant ex-China, there is a pre-existing buffer that limits any immediate upside traction in prices. Also, higher prices could encourage production restarts. But if the downward trend in premiums resumes from Q2 as the new LME rules kick in as we expect, the risks are skewed to further production cuts and bouts of tightness in LME time spreads, Barclays concluded.