 "Aluminium outperforms other metals except nickel")
Much to the relief of aluminium producers, the white metal has outperformed other non-ferrous metals in price gains, except nickel, which managed to advance 40 per cent after Indonesia put a ban on minerals exports in January.
The three-month aluminium price, which in some intraday trades at London Metal Exchange (LME) breached the psychologically important $1,900 a tonne, has risen to its highest since August 2013. The undoing of aluminium for a long time has been excess capacity outside China and its use leading to the build up of stocks of over 5 million tonnes (mt) at LME warehouses. Equally big, if not larger, inventories are held at non-LME storehouses. Such large stocks coincided with major demand slump for all metals in the world's leading economies struggling to come out of recession. No wonder, aluminium, the second-most used metal after steel, crashed to a four-and-a-half-year low of $1,675 a tonne in February.
National Aluminium Company (NALCO) chairman Ansuman Das, however, saw at that time that production discipline exercised by industry leaders such as Alcoa and Rusal and green shoots of growth becoming visible in the US, Japan and most of Europe would bring aluminium close to $1,900 a tonne in the middle of this year.
Das believes the market has gained strength from the global market deficit, excluding China. The world's biggest aluminium producer Rusal has estimated the deficit to reach a record 1.3 mt this year and 985,000 tonnes in 2015. This is happening on the back of up to 1.5 mt smelting capacity in non-China centres to be idled this year. Rusal says aluminium stocks with LME down by over 260,000 tonnes since year start are at their lowest in 13 months. Besides the growing tightness in physical market, demand for the metal from financiers leveraging continuing low interest and roll over facility remains robust. In a situation like this, physical premiums paid on top of LME prices for ready delivery can only move north. Premiums have climbed to record levels in Europe, Japan and North America. Das says NALCO is getting premiums of $380 a tonne for billets.
Where do aluminium prices go from here? Rises of options open interest in June were to be linked to bets being placed on prices rising through 2015. Goldman Sachs says in a report rising bauxite prices resulting from Indonesian ban "will, in our view, eventually place pressure on Chinese aluminium producers to cut production, supporting our medium term bullish view" of the metal. Aluminium, according to Rusal, could potentially test $2,000 a tonne in the next few weeks. According to Das, aluminium at this point remains underpriced and it offers much upside scope. However, if prices are to rise by $300 a tonne, some rested capacity outside China is likely to become operational.
A positive price outlook acts as an incentive for the industry to consider building new smelters using cost effective technologies. Shedding high cost capacity across the world will take some more time. But the industry has to be ready with new smelters to take care of an anticipated 50 per cent increase in aluminium demand to 75 mt by 2025. World aluminium demand is to grow 6 per cent this year. "New smelting capacity will proximate to places where energy is abundantly available at cheap rates. You will see Canada with its plentiful supply of hydroelectricity, West Asia with its rich gas resource and south-east Asian countries endowed with coal and gas hosting new aluminium smelters," says Das. Quebec in Canada has identified aluminium as a "key component" of is growth plan for the next decade.
In fact, NALCO too has shortlisted six energy rich countries in West Asia and south-east Asia for building its second smelter with capacity of 500,000 tonnes backed by a 1,200 MW power complex. "Wherever we finally build the smelter, it will be a joint venture with a local partner. We will be the majority owner of the JV retaining management control. Cheap energy will underpin viability of offshore smelter," says Das. Energy alone accounts for 30 to 35 per cent of aluminium production cost. This explains aluminium makers' wariness of coal block auctions making deposits expensive. Unlike power producers aluminium groups don't have the benefit of 'coal price through facility'. LME alone decides aluminium prices.
The three-month aluminium price, which in some intraday trades at London Metal Exchange (LME) breached the psychologically important $1,900 a tonne, has risen to its highest since August 2013. The undoing of aluminium for a long time has been excess capacity outside China and its use leading to the build up of stocks of over 5 million tonnes (mt) at LME warehouses. Equally big, if not larger, inventories are held at non-LME storehouses. Such large stocks coincided with major demand slump for all metals in the world's leading economies struggling to come out of recession. No wonder, aluminium, the second-most used metal after steel, crashed to a four-and-a-half-year low of $1,675 a tonne in February.
National Aluminium Company (NALCO) chairman Ansuman Das, however, saw at that time that production discipline exercised by industry leaders such as Alcoa and Rusal and green shoots of growth becoming visible in the US, Japan and most of Europe would bring aluminium close to $1,900 a tonne in the middle of this year.
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Emerging nations pursuing urbanisation and infrastructure development are providing props to the aluminium market. China, which had close to half the share of world aluminium production of over 50 mt in 2013, is playing ball with domestic demand, without leaving any large surplus for exports. The country will continue to remain a big producer of energy intensive white metal, but principally for domestic use. This explains why global price improvements are not affected by China commissioning nearly 2.5 mt of smelting capacity in 2014. Falling in line with prime minister Li Keqiang's policy for a major cut in carbon emissions by metals industries, about 3 mt of aluminium capacity has been identified for disbanding this year. Capacity adjustment is happening in a year when Chinese demand for aluminium is likely to grow by 10 per cent. As a result, aluminium market at the world's largest production and consumption centre will remain balanced in 2014.
Das believes the market has gained strength from the global market deficit, excluding China. The world's biggest aluminium producer Rusal has estimated the deficit to reach a record 1.3 mt this year and 985,000 tonnes in 2015. This is happening on the back of up to 1.5 mt smelting capacity in non-China centres to be idled this year. Rusal says aluminium stocks with LME down by over 260,000 tonnes since year start are at their lowest in 13 months. Besides the growing tightness in physical market, demand for the metal from financiers leveraging continuing low interest and roll over facility remains robust. In a situation like this, physical premiums paid on top of LME prices for ready delivery can only move north. Premiums have climbed to record levels in Europe, Japan and North America. Das says NALCO is getting premiums of $380 a tonne for billets.
Where do aluminium prices go from here? Rises of options open interest in June were to be linked to bets being placed on prices rising through 2015. Goldman Sachs says in a report rising bauxite prices resulting from Indonesian ban "will, in our view, eventually place pressure on Chinese aluminium producers to cut production, supporting our medium term bullish view" of the metal. Aluminium, according to Rusal, could potentially test $2,000 a tonne in the next few weeks. According to Das, aluminium at this point remains underpriced and it offers much upside scope. However, if prices are to rise by $300 a tonne, some rested capacity outside China is likely to become operational.
A positive price outlook acts as an incentive for the industry to consider building new smelters using cost effective technologies. Shedding high cost capacity across the world will take some more time. But the industry has to be ready with new smelters to take care of an anticipated 50 per cent increase in aluminium demand to 75 mt by 2025. World aluminium demand is to grow 6 per cent this year. "New smelting capacity will proximate to places where energy is abundantly available at cheap rates. You will see Canada with its plentiful supply of hydroelectricity, West Asia with its rich gas resource and south-east Asian countries endowed with coal and gas hosting new aluminium smelters," says Das. Quebec in Canada has identified aluminium as a "key component" of is growth plan for the next decade.
In fact, NALCO too has shortlisted six energy rich countries in West Asia and south-east Asia for building its second smelter with capacity of 500,000 tonnes backed by a 1,200 MW power complex. "Wherever we finally build the smelter, it will be a joint venture with a local partner. We will be the majority owner of the JV retaining management control. Cheap energy will underpin viability of offshore smelter," says Das. Energy alone accounts for 30 to 35 per cent of aluminium production cost. This explains aluminium makers' wariness of coal block auctions making deposits expensive. Unlike power producers aluminium groups don't have the benefit of 'coal price through facility'. LME alone decides aluminium prices.