NAB Aluminium Outlook: November 2016

The global aluminium market continues to be driven by Chinese producers, which plan to add significant new capacity at lower costs.

By

Key points:

  • The aluminium market will continue to be shaped by significant capacity additions in China. A large portion of the new capacity will be based in the north western regions of Xinjiang and Inner Mongolia, with access to captive coal mines and lower cost electricity. The industry, however, has been singled out by the Chinese government in its new five year plan for the non-ferrous metals sector as ‘severely over capacitated’ and directions have been issued to control any capacity additions. A joint statement with the US was also issued post the G20 meeting in September to tackle global excess supply. If effective, these measures could see production expansions or restarts curbed, making the future aluminium supply glut less severe than previously anticipated.
  • Demand growth will continue to slow in China, while growth from the rest of the world is unlikely to be fully offsetting for the market balance, particularly given anticipated supply increases. However, some positive long term trends exist for aluminium demand – the increasing use of aluminium sheets in car manufacturing, and aluminium wire instead of copper in the power sector, will support underlying demand.
  • The spectacular run-up in aluminium premiums has now been reversed following the introduction of tough measures by the LME to tackle warehousing bottlenecks and high load-out charges. Inventory levels at various LME locations have been on the decline and premiums now more reflect underlying supply and demand factors.
  • Popular inventory financing trades using the metal could face new challenges as forward curves shift and US interest rates rise. The reversing of such trades could potentially release large quantities of metal into the market, putting further downward pressure on prices.
  • Overall, we forecast a well supplied market in 2016 and 2017, with prices averaging at USD $1595/tonne and $1670/tonne. In 2018, demand prospects could improve with a higher average price forecast of $1740/tonne.

For further details, please see the attached document: