Aluminium: Fork In The Road With Risks To The Downside

BMI View: Going into 2014, we believe aluminium prices face a crucial juncture. Global overcapacity has resulted in production outpacing consumption since 2005, leading to sustained surpluses and in recent years, weaker prices. With the metal currently trading below US$1,800/tonne, prices are below production costs for some firms, and our core view is that further supply rationalization will lead to some price support. That said, two key downside risks loom large. These are LME reform and the potential for an increase in Chinese exports.

Aluminium prices remain persistently weak, and the next quarter is likely to give significant clarity as to the metal's direction as the effect of production cuts and LME reforms on the global aluminium market becomes clearer. In October 2013 we revised our 2014 aluminium price forecast downward to US$1,900/tonne, noting persistent global overcapacity and potential LME reforms, since approved, that could bring more metal onto the market.

For now, we are expecting some stabilisation in prices over the coming quarters. Though aluminium prices are currently trading around 5% below US$1,900/tonne, we note that according to various industry estimates, sustained prices below US$1,800/tonne renders significant amounts of production unprofitable, with costs exceeding prices. Therefore, embedded into our price forecasts is the assumption that announced supply cuts by Alcoa and Rusal will be forthcoming, and that other companies may follow suit in curbing output. However, given significant overcapacity in the global aluminium market, we believe further supply cuts will be needed to result in a sustained rally in prices. Far more drastic cuts among western producers would be needed to fully equalize market supply and demand. Indeed, global production, excluding China, grew in the first three quarters of 2013, driven by increases in production in Germany, Qatar, the UAE, and Canada. Production in these four countries made up nearly a quarter of global refined production ex-China during the period. Growth in Germany grew 18.2% from the same three quarters in 2012, while Qatari production grew by 14.7%. Canada and the UAE saw more muted growth of 9.7% and 4.7%, respectively. While Germany remained a significant net importer of the metal, the other three all remain large net exporters, further adding to the global surplus. We note two factors that present major downside risks to our price view:

Aluminium Continues To Underperform
Price Ratio: Aluminium/S&P GSCI Industrial Metals Index

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Sector: Commodities

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