Aluminium prices fold again

Supply, especially from China, has been increasing, adding to the price pressure



Amidst the metal meltdown last year — when iron ore and copper prices collapsed — aluminium was the bright spot.

The light-weight metal saw prices rise from under $1,700 per tonne in early 2014 to over $2,100 per tonne in November 2014, as delivery premiums remained high. But the metal then fell to $1,700 and rose a bit to $1,900 a tonne by May 2015.

Just as aluminium manufacturers heaved a sigh of relief, the metal resumed its downward slide and hovers close to $1,660 a tonne currently. This is a six-year low. So, are low aluminium prices the new normal?

Lower premiums

One reason for the lower price is the steep fall in delivery premiums, which indicate waiting periods faced by buyers to receive delivery. From a high of $532 per tonne in late February, the US mid-West premiums are down to around $185 per tonne currently. Aluminium delivery premiums were at historical highs in 2014, as warehouses registered with the LME faced delivery bottlenecks. Analysts estimated that about 60-70 per cent of the stocks were possibly tied up in commodity financing transactions and hence not available for physical delivery. The LME formulated stricter regulations to cut waiting time, but the move was stayed by a lawsuit from aluminium producer Rusal. As a result, premiums continued to soar.

The court ruled in favour of the metal exchange in October 2014 and new rules have been put in place from February 2015. This has helped reduce delays and lower spot aluminium prices.

On the fundamental side, aluminium supply, especially from China, has been increasing, adding to the price pressure.The country added 2.6 million tonnes of production capacity in 2014 and plans to add another 3.6 million tonnes in 2015.

This is much higher than the 0.5 mt addition in the rest of the world during the same period. Overall global aluminium production capacity is estimated to increase to 68.5 mt by 2015.

Even as aluminium smelters globally are being shuttered as prices dip, China has been boosting production. Output from Xinjiang province surged over 60 per cent in the first four months of 2015.

The cost of production at these smelters is low, thanks to captive coal mines and power plants. And the bulk of the production is being exported, as weak local demand has led to depressed prices. Higher exports from China have contributed to the crash in global aluminium prices.

China’s production ramp-up was helped by ample global ore availability.

The country faced issues in sourcing bauxite ore after Indonesia banned exports. But ore imports from other countries have since increased. Additionally, companies such as China Hongqiao are investing in Guinea in Africa, which holds over a fourth of the world’s bauxite reserves. This should help ensure improved ore supply in the future.

Price outlook

So, with the ore issue under control and higher production capacity, Chinese production seems to be on a firm wicket. Therefore, lower aluminium prices may be here to stay.

The only positive for aluminium producers is the recent uptrend in demand. One main demand driver for aluminium is the automobile sector, which is progressively replacing heavy steel with lightweight aluminium to meet more stringent fuel efficiency norms.

For example, in the US, average fuel economy must be doubled — from 27.5 miles per gallon in 2012 to 54.5 miles per gallon by 2025.

Manufacturers, such as Ford, have already launched aluminium body vehicles and others are looking to increase aluminium content.

This is expected to boost demand, putting a floor on prices.

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