NEW DELHI – Aluminium prices are set to continue their downtrend in the near term as output of the metal has been on a rise while the COVID-19 pandemic has decimated the demand.
The prices have already declined 17% since the beginning of the year, and they are set to see another 10-13% fall in the near term, industry experts believe.
“The global aluminium market is set to record a sizeable surplus this year as supply is unlikely to fall in line with a sharp drop in demand,” Commodities Economist at Capital Economics James O’Rourke said in a note. “The surplus is likely to match the one following the recession of 2008-09 and could prevent the aluminium price from returning to pre-crisis levels for many years.”
Cost of shutting or maintaining an idled capacity is very high for the producers, making it difficult for them to curtail operations. Shutting an aluminium smelter damages the raw material as cooling of carbon cathode leads to numerous cooling cracks on its surface, making it unviable for future use.
At the same time, falling prices of raw material such as alumina and carbon, and depreciation in the currencies of producing countries have prompted smelters to operate at nearly their full capacity.
On the other hand, the COVID-19 pandemic has led to growing concern over an economic contraction, making the metal more vulnerable to fluctuations, and the lockdowns across the globe have led to the absence of any tangible demand in sight.
According to International Aluminium Institute, the global production of refined aluminium rose 1.3% on year to 15.9 mln tn in Jan-Mar. Rusal, the world’s largest producer of the metal outside China, said the rise in the production was despite around 24% of global capacity turning loss-making.
Data released by China’s National Bureau of Statistics showed the country produced 11.93 mln tn of aluminium, up 2.4% on-year in the Jan-Apr period.
Further, despite the closure of some smelting capacity–Alcoa Corporations’ 30% and China’s 1%–market participants believe the producers may not be taking the long-term demand repercussion of the COVID-19 crisis very seriously.
Alcoa Corporation, the world’s second-largest aluminium producer, recently said it will ship 2.9-3.0 mln tn aluminium this year, slightly shy of its earlier estimate of 3.1 mln tn due to economic fallout of the crisis. It said the change in the forecast was due to its move to curtail capacity at a plant in Washington state later in 2020.
It, however, did not provide its quarterly projections on how it views supply and demand dynamics in the bauxite, alumina, and aluminium markets.
Group International PJSC, one of Russia’s largest producer last week said its performance in Jan-Mar was robust, with aluminium production at 940,000 tn, up 1.3% on year.
“Assuming a steady rise of 3% in production and demand contracting at half the pace than that in Q1(Jan-Mar), we could still add more than 1 mln tn of surplus in Q2 (Apr-Jun). This could add up to 2.75 mln tn of surplus in H1 (Jan-Jun),” Regsus Consulting Director Sandeep Daga said.
“However, there is a possibility of an upside revision in this surplus as several aluminium product makers, including Rusal and Alcoa, have switched away from value-added products and into primary metal production in last two months. The demand for products is very poor,” he added.
As per a survey by Shanghai Metals Market, the sharp rise in Chinese aluminium production comes despite a 5.5% slump in consumption to 10.7 mln tn.
The rising supply pressure of the metal also comes in the wake of a sharp drop in demand in the automotive industry as travel restriction across the world and stringent containment measures have brought these avenues to a near standstill.
The light, strong, and flexible metal makes up 75-80% of a modern aircraft, while it forms an integral element in modern-day car manufacturing, which pays more attention to fuel efficiency and reduces carbon emission. The metal is also used in the rail transport system as it transports coal, various rocks and minerals as well as grain.
“The demand outlook for aluminium primarily used in the transport and construction sector is expected to remain bleak. Global automobile sector which was struggling long before the outbreak of coronavirus pandemic has further deteriorated following the outbreak with (a fall in) vehicle sales across major economies. Going forward the revival in the auto sector is expected to be a long and arduous task, which may not bode well for aluminium demand,” Kotak Securities’ Head of Commodity Research Ravindra Rao said.
IHS markit expects global automotive sales to fall 22% in 2020, with sales in the US seen declining 27%. The agency expects the restart of automotive production to be very gradual due to a slow pick-up in sales. Further, with job-losses in all parts of the world, discretionary spending, like buying a car, could take a backseat.
Owing to the higher production, traders now have been scratching their heads over the mounting inventory of the metal as most LME warehouses in Asia have hardly any space left.
Industry experts fear that unless LME approves more warehouses, the metal might run out of exchange sheds by around end of May. Aluminium stockpile at the LME-accredited warehouses has already been above the psychologically crucial 1-mln-tn mark since December.
Kotak Securities’ Rao sees aluminium prices to remain under pressure and may fall to $1,290 per tn on LME and 116 rupees per kg on MCX in the near-term.
Currently, the three-month contract on LME stands at $1,469 per tn, and at 130.2 rupees per kg on MCX. End