Supply-demand dynamics brighten aluminium

Automobile sector and EU’s emission norms steer growth



The aluminium market is perking up, with the average price per tonne on the London Metal Exchange rising to over $2,000 now from $1,693 in February 2014. While the primary reason for this is high physical delivery premium, the supply-demand dynamics are also brightening.

This is due to a long waiting period and a court battle looming over the metal, owing to warehouse rules on delivery. In the last few years, warehouses registered with the LME were witnessing bottlenecks after metals such as aluminium were used as a financing tool.

Now, over ten million tonnes is estimated to be stored in the LME warehouses, split equally between official warehouses and unofficial ones. Fitch believes that around 60-70 per cent of the stocks are tied up in commodity financing transactions.

To reduce warehousing logjams, the LME, late last year, formulated stricter regulations. These rules, which were to have taken effect from April 1, 2014, were expected to cut the waiting time for metal delivery. But, aluminium producer Rusal had raised objections and the London High Court halted LME’s new warehouse rules from taking effect. The ruling has fuelled a further increase in premiums.

While it is unclear when and how the premium correction scenario would unfold – in an orderly way over time or a disorderly correction if a settlement is reached – it is certain that premiums will see a reduction.

Demand revs up

However, basic metal price may remain stable as the long-term supply-demand equation is turning to a deficit and a few demand triggers are emerging. Recent forecast from Alcoa, the largest US aluminium producer, predicts that demand will exceed production this year, ending a decade-long spree of surplus. On the supply front, the falling prices of the light-weight metal, since the high of $2,200 a tonne reached in 2012, have forced many producers to close their smelters. This, along with ore export bans in Indonesia, which may limit output from China, could help cap output levels. While there are lingering concerns about demand pick-up in China, a key consumer, the overall picture appears bright. The main driver for growth is expected to come from the automobile sector. Hopes of higher aluminium usage in cars and trucks have been making the rounds for a while, but this may be a reality soon when Ford’s F-150 truck, with a full aluminium body, goes into production later this year. Also, stricter emission norms in the EU are likely to boost the metal’s demand in the long term.

Overall, average aluminium prices on the LME, including premiums, may increase by a marginal 2 per cent in 2014 to $2,100 a tonne, according to Crisil estimates.

India picture

The domestic market is facing mixed fortunes with demand shining and supply prospects sooty. This is due to coal supply concerns. India’s aluminium consumption is quite low compared with the world average; it is, however, expected to improve. Demand is expected to be robust, aided by growth in the construction and power sectors as well as a pick-up in the automobile segment.

These sectors account for over three-fourths of domestic consumption. Additionally, an uptick in manufacturing of solar panels may also be a positive sign.

Many producers are ramping up new capacity, significantly adding to supply. The existing capacity of nearly 1.9 MT is expected to double in the next five years. These ambitious plans, however, have to overcome a lot of hurdles. For one, profitability is likely to be low due to the high input cost of coal and power.

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