Friday, August 1, 2014

Aluminium to swing to deficit in 2015 after output cuts, ban

* Strong demand seen from U.S. auto industry
* Stock overhang expected to weigh on prices
* Premiums remain at record highs around $450/T duty-paid

Aluminium to swing to deficit in 2015 after output cuts, banLONDON, July 31 (Reuters) - The aluminium market outside China is set to record its first deficit in nine years in 2015 following production cuts and an Indonesian ore export ban, a turning point that could be the start of a prolonged shortfall as demand recovers.

After years of chronic oversupply, the market is beginning to tighten as producers cut production to battle rising costs, Indonesia bans bauxite ore exports and demand for aluminium rises, particularly from U.S. auto makers.

Analysts say the market could remain in deficit beyond 2015 but that historically high global aluminium inventories are likely to prevent much of a rise in prices.

The consensus forecast in a July Reuters poll was for a 444,000 tonne deficit in 2015, which would be the first market deficit since 2006, according to Thomson Reuters GFMS. 

"This is a market in massive structural surplus, though the physical market has moved into deficit," said Stephen Briggs, senior metals strategist at BNP Paribas.

"The deficit could be quite prolonged, but it needs to be. There's an awful lot of hidden inventory, not just in China but in the West, in financing deals and in warehouses."

Estimates of aluminium inventory outside China are at around 12 million tonnes. In LME-registered warehouses alone, stocks amount to nearly 5 million tonnes, although they have fallen by around 9 percent since the beginning of the year.

In China, the market is still in surplus, but that is expected to shrink due to the closure of some 2 million tonnes of aluminium capacity at high-cost smelters.

Outside China, producers have cut back as low prices and high costs erode margins. Daily average aluminium output fell to 67,000 tonnes in June from 67,500 tonnes in May, according to the latest data from the International Aluminium Institute.

Highlighting reduced output, Russia's United Company Rusal <0486.HK>, the world's largest producer, said in May its first-quarter primary aluminium production declined by 2.3 percent. 

Benchmark London Metal Exchange (LME) aluminium prices hit a 17-month high of $2,054.75 a tonne last week and have gained nearly 12 percent in the year to date. But the metal is still down around 30 percent from a May 2011 peak of almost $3,000.

"We think an all-in price of around $2,500/T will be needed to incentivise restarts of high-cost smelters in Europe and Brazil, and thus current curtailed capacity of around 1 million tonnes per annum there is unlikely to come back anytime soon," Macquarie analysts said in a note.

In contrast to cutbacks in the West, smelters in the Middle East and India are expected to ramp up production, in a move that could help ease some of the tightness in the market.

The United Arab Emirate's Emirates Aluminium is expected to add production of 449,000 tonnes this year and the Saudi Arabian Mining Co <1211.SE> 330,000 tonnes, according to Macquarie.


A major factor driving the deficit view is a bullish outlook for the demand, particularly from the automobile industry as it moves to produce lighter, more energy-efficient vehicles.

Ford Motor plans to launch a new aluminium-intensive truck this year, and aluminium firms have announced plans to build plants to fabricate sheet for automakers, whose names have mostly not been disclosed.

"In the automotive sector you see a clear advantage for light metal," said Svein Richard Brandtzaeg, chief executive of aluminium producer Norsk Hydro , adding that the aluminium market was in its strongest shape since 2008/09.

"There are new efficiency rules in the U.S market and EU regulation on carbon emissions. We see that U.S. (demand) is growing faster than Europe."

European aluminium traders said they are seeing a rise in enquiries for material at a time of year that is usually quiet as the western hemisphere traditionally winds down for summer.

The stronger demand, combined with restricted access to the metal, has helped keep European aluminium premiums, or costs to obtain physical metal, at record highs of around $450 a tonne for duty-paid material.

Financing deals and logjams in accessing metal from LME-registered warehouses have helped underpin premiums, with wait times to get metal backlogged by two years at warehouses in the Dutch port of Vlissingen, which holds more than 2 million tonnes.

"The rise in premiums has helped the all-in price improve from the first to second quarter. That's a big plus to the producers," an aluminium trader said.

"There's scope for premiums to rise. Material is still stuck in queues, and demand is pretty strong at the moment."

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