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MOSL METALS-CRU, global producers point at continuing aluminum deficit

METALS: CRU, global producers point at continuing aluminum deficit; Excess inventory build-up could be erased by 2020-21

 

CRU, a commodity-focused global analytical firm, recently hosted a call highlighting its view on the aluminum market trends. It expects the aluminum market to remain in deficit in 2019 on account of (a) the lack of new investments and (b) the closures of illegal Chinese capacity, despite muted demand expectations (ex-China: <1% growth). Furthermore, inventory (in days of consumption) is trending down toward the 2007 levels. According to CRU, LME prices will have to increase to ~USD2,200/t for new smelters to be economical. We note that global aluminum producers (Alcoa, Rusal and Hydro) have also maintained a similar stance. With continuing deficit and lower inventory days, LME prices are likely to increase over the medium term. This would be positive for Nalco and Hindalco.

Smelter investments at historical low

• Aluminum smelter capex outside China has been at historical lows, given the low LME prices. CRU noted that upcoming capacities by Rusal would require LME prices of ~US2,200/t for their viability. Besides, planned smelting capacities, such as that in Vietnam, are facing financing issues, given the low LME prices (currently at ~USD1,750).
• CRU highlighted that a few capacities outside of China have permanently closed due to low LME prices and higher operating cost. In fact, aluminum production outside of China has not grown over the last five years, even as demand has increased.
• The analytical firm also highlighted that the smelters in Australia and some parts of Europe would come under pressure at LME prices of USD1,650-1,700. Further, if section 232 of tariffs were to be done away, the plants restarted in the US would no longer be profitable.
• New smelter investments in China have also become difficult due to supply-side reforms and environment initiatives. About 4-5mt of illegal smelting capacity was closed in China. New capacities can only be built by replacing old plants. Rusal notes that regulator actions like winter cuts, capping on coal consumption, the launch of the national carbon market and the shutdown of capacities that breach the environment norms will create barriers for unreasonable new capacity addition in China.
• Chinese operating smelter capacities have not grown over the last two years, despite new ramp-ups (Exhibit 1)
• CRU noted that China's aluminum demand will increase by ~0.9mt annually, even after building in the likelihood of weaker demand. China will need new smelter capacities by mid-2020s, according to CRU.