Aluminium: Slow Growth To 2016

BMI View: We have revised down our forecasts for Australian refined aluminium production for 2016 due to continued weakness in the region's aluminum end markets. We expect production to reach 2.1mnt (million tonnes) by 2016, growing at an average rate of 1.5% per annum from 2011 levels. Domestic consumption in Australia is likely to remain weak owning to our negative view of the country's construction market and is set to grow at an annual average rate of 0.7% from 2011 to 2016.

We expect more weakness in Australia's aluminium end markets over the coming years and expect refined aluminium production to reach 2.1mnt by 2016, growing at a modest rate of 1.5% per annum from 2011 levels. The country's refined aluminium production came in at 1.95mnt in 2011, an increase of only 0.9% from 2010 levels. Australian aluminium output pales in comparison to the country's production of bauxite. The country accounts for approximately 29% of global bauxite output, the direct feed into alumina, which is then processed to become primary aluminium. In contrast, Australia accounts for a much smaller share of global refined aluminium production, at 5% of the world's total. With exports at 86% of domestic production in 2011, Australia is the fourth-largest aluminium exporter in the world, accounting for 7.9% of global exports.

Geared Towards Exports
Australia - Aluminium Production & Exports (kt)

Rio To Drive Production Growth

Smelting operations in Australia are concentrated, with Rio Tinto's Boyne Island and Bell Bay smelters, Tomago Aluminium (a joint venture between Rio Tinto Alcan, Gove Aluminium Finance and Hydro Aluminium) and Portland's operations (a joint venture between Alcoa and Alumina Ltd) making up approximately 91% of the country's output.

Rio Tinto announced in October 2011 that it would streamline its aluminium product group following a strategic review that will allow Rio Tinto Alcan to concentrate on growing the value of its high quality, tier one assets. According to the review, Rio Tinto's interests in six Australian and New Zealand assets will transfer into a new business unit, to be called Pacific Aluminium, and these assets will be managed and reported separately from the Rio Tinto Alcan product group prior to divestment.

Rio Tinto To Increase Dominance Of Sector
Aluminium Production By Refinery, 2011

Production Targets To Continue Contracting

We expect production growth to remain weak in the coming months as low aluminium prices and significant overcapacity weigh on investment. We expect aluminium to average US$2,000/tonne in 2012 and US$1,950/tonne in 2013, compared to US$2,421/tonne in 2011. Combined with high energy and alumina costs, low prices will keep producer margins under pressure.

The imposition of a carbon tax by the Australian government will further weigh on miners' profits and reduce the overall attractiveness of future development projects. This is especially true for the aluminium sector, the production of which is an energy-intensive process. Producers of aluminium have been forceful opponents of policies to reduce greenhouse gas emissions, stating that higher energy prices would damage its competitiveness and force it to move offshore. Moreover, the mining industry continues to face rising wage costs and a shortfall in financing as banks grow more cautious, both of which are likely to hamper mining investment.

Long-Term Production Outlook Modestly Positive

While the short-term outlook remains challenging, we expect refined aluminium production in Australia will continue to grow, albeit at a modest pace. BMI expects primary aluminium output to increase as key players, such as Rio Tinto, continue to pursue greenfield programmes in Australia. Indeed, we expect growth in aluminium production to pick up from 2013 as Rio Tinto's expansion of its Weipa bauxite mine in the country comes online. Overall, we expect annual average output growth of 2.3% from 1.9mnt in 2011 to 2.2mnt in 2016. Factored into our forecasts is an expectation that persistently low prices will result in additional scaling back of current production plans by the major producers.

There is also potential for greater exports to China over the medium term, despite the continued slowdown in the Chinese economy that we forecast. China currently runs a domestic aluminium production surplus, but this could be threatened as Indonesia increasingly restricts exports of raw materials such as bauxite. China's domestic aluminium industry is heavily reliant on imports of bauxite from Indonesia.

Japan Heavily Dependent On Australian Exports
Australia - Exports of Aluminium, 2011

Demand To Grow Slowly

On the demand side we forecast average annual consumption growth of 0.7% from 2011 to 2016. This is down from our previous forecasts of 0.9%, but represents a modest acceleration after several years of stagnation. We assign downside risks to our forecasts on the back of an expected slowdown in Asia's economic growth in 2012. In terms of exports, Australia is the third-largest exporter of bauxite, after Indonesia and Jamaica, and the fourth largest exporter of refined aluminium, after Russia Canada, and the Netherlands. Australia accounts for approximately 7.9% of global refined exports, with most of products destined for South Korea, Japan and Taiwan.

On the back of deteriorating fundamentals and growing imbalances, we believe that the Australian economy will continue to face headwinds, and have thus maintained our 2012 real GDP growth forecast at 2.1%. Looking ahead, we expect growth in 2013 to slow further to 0.9%. We are also seeing some weakening signs in Australia's domestic property market. Low auction volumes in July and declining growth of total housing loans in June both point to a reduction in housing demand. Growth in both owner-occupied and total housing loans fell to new lows of 6.6% year-on-year (y-o-y) and 6.9% y-o-y respectively in June. We believe that the uncertainty surrounding domestic and external economic conditions will continue to keep households wary of entering the housing market, and thus reducing housing demand and price pressures.

Table: Australia - Aluminium Production & Consumption
2009 2010 2011 2012f 2013f 2014f 2015f 2016f
f = forecast. Source: BMI, World Bureau of Metal Statistics (WBMS)
Aluminium production, mnt 1.94 1.93 1.95 1.96 1.99 2.02 2.06 2.09
- % change y-o-y -1.7 -0.6 0.9 0.8 1.4 1.5 1.9 2.1
Aluminium consumption, kt 312 312 312 305 306 308 311 316
- % change y-o-y 0 0 0 0.1 0.2 0.8 1.1 1.6
This article is tagged to:
Sector: Metals
Geography: Australia, China, Japan, South Korea, Thailand, Taiwan

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