Aluminum: It’s all about the oversupply

UNITED KINGDOM July 06 2015 9:35 AM

LONDON (Scrap Register): Deutsche Bank’s downside risk case for aluminum has come to pass. Sharply falling premiums have not been offset by a rising LME price, which has also fallen.

The all in aluminum price has fallen by 21% year to date, exacerbated by less than inspiring Chinese macro data and the uncertainty of a Grexit weighing on sentiment. Industry deflation via lower coal prices and technology gains mean that the only 11% of global smelters and 10% of Chinese smelters are loss-making.

Given the propensity for China to continue exporting, a managed supply cut by some of the producers ex- China may only result in encouraging further exports as regional premiums rise once more.

As highlighted in the case of European stainless steel, it is only through anti-dumping measures that Chinese exports are likely to decline. Some of the high cost producers ex-China may hang on for a period, but ultimately, we see an increased likelihood of further curtailments.

Whilst near-term risks remain, we do expect a pick-up in Chinese demand in H2, with easing monetary and fiscal measures being at least partially successful. This should support a price recovery from current spot prices. Given the strong start to Chinese production in the first five months of the year, analysts at Deutsche Bank still forecast a modestly over-supplied market for the foreseeable future.

Aluminum prices will be highly influenced by marginal costs over the next five years, which have been rebased by lower coal prices especially in China, and as a result, Deutsche Bank has cut our forecasts by 13% over the next five years.

Deutsche Bank forecasts the Chinese smelting industry to contribute over 40% of new smelting capacity to the end of the decade, and is therefore likely to be very influential on the long-term incentive price. The increasing competitiveness of the industry has led to a 12% downgrade to our long-term price to $2,105 a ton.