Aluminium has for years been driven by a strong demand for an array of both increasingly sophisticated, as well as more standard aluminium based products being rapidly bought up by emerging market economies.
These range from high tech phones and cameras, to automobiles (perhaps the largest single consumer of aluminium) and even spaceships. These products are not going anywhere. In fact, market research clearly indicates that the need for aluminium-based products is only set to grow - and rapidly in the coming years.
MARKETS
The Path Ahead for Aluminium
What has been at the root of the price stumble of one of the most sought after metals in the world?
November 19, 2015
Aluminium prices have shown great volatility in 2015, despite a consistent upward movement in global demand.
Signs that the market price had begun a steeper than anticipated decline, were evident by June, when the average LME cash price fell below USD 1,700 per tonne. In the third quarter of 2015, LME aluminium price experienced another contraction and averaged around USD 1,589 per tonne, a 20% decrease from the same period last year.
In November, the LME price decreased further and is trading at an average of USD 1,470 per tonne.
So what has been at the root of the price stumble of one of the most sought after metals in the world ?
So what has been at the root of the price stumble of one of the most sought after metals in the world ?
There are multiple factors which contribute to determining market prices, demand of course, being an important one.
Global aluminium demand grew by 5.6% to 43.4 million tonnes in the first nine months of 2015
Since the beginning of the year, global aluminium demand has grown by 5.6% to 43.4 million tonnes. However, growth could have been stronger if not for the economic slowdown in some aluminium markets, such as Japan, Russia and South America.
However, it is relevant to note that the slowdown in aluminium consumption in these countries have been accompanied by a similar decline in demand for other valued metals, such as copper, bromine, coal and even non commodity goods. Broadly speaking, these are the inevitable casualties of weak global growth.
It should also be noted that the steep decline in these markets have been more than offset by the growth in demand for aluminium in North America, India, the Middle East and the EU, as well as the key market of China.
However, it is relevant to note that the slowdown in aluminium consumption in these countries have been accompanied by a similar decline in demand for other valued metals, such as copper, bromine, coal and even non commodity goods. Broadly speaking, these are the inevitable casualties of weak global growth.
It should also be noted that the steep decline in these markets have been more than offset by the growth in demand for aluminium in North America, India, the Middle East and the EU, as well as the key market of China.
In North America and the EU, the key driver of demand growth in 2015 was the automotive industry.
Between January to September of this year, North American automakers built 13.5 million vehicles, an increase of 3.2% compared to the same period in 2014. Meanwhile in the EU, September saw another strong month of growth worth 9.8% in the EU passenger car market. Overall, the demand for new passengers cars was up in all major European markets, driven by ongoing scrappage schemes and the economic recovery in Southern Europe.
This development has been illustrated by the increase in the registration of new passenger cars in Europe, up 8.2% from 2014. Overall, the upturn in the EU market in the first three quarters of the year can largely be attributed to growth in demand for new passenger cars for all the major markets.
In light of these developments, RUSAL, one of the world's biggest aluminium producers, has predicted that global demand for aluminium will grow to 58 million tonnes for the whole of 2015.
'China' Factor
A more plausible explanation for the depressive pricing environment has been the rapid growth of supply capacity - especially in China and the Middle East. China's aluminium industry, supported by strong subsidies, added an additional 2.45 million tonnes in capacity between January and September 2015.
This has raised the total Chinese aluminium production capacity to 37.7 million tonnes, despite a drop of 10.2% in domestic prices on the Shanghai Future Exchange. The SHFE price slump has continued throughout October, making over 70% of Chinese aluminium production unprofitable.
This has raised the total Chinese aluminium production capacity to 37.7 million tonnes, despite a drop of 10.2% in domestic prices on the Shanghai Future Exchange. The SHFE price slump has continued throughout October, making over 70% of Chinese aluminium production unprofitable.
Globally, the oversupply in the market is set to record 373 thousand tonnes, according to RUSAL's forecast. The major current challenge affecting prices this year has been the growth of semi finished aluminium exports from China.
While China does not export primary aluminium due to an export tariff, it offers a VAT tax rebate for semi-finished aluminium products, leading some Chinese aluminium producers to export semi finished aluminium products only to remelt them back into primary metal to be sold on the global market. There is, however, an expectation that these actions are set to decrease toward historical trends as the country cuts down on production and actions of market arbitrage tapper off.
While China does not export primary aluminium due to an export tariff, it offers a VAT tax rebate for semi-finished aluminium products, leading some Chinese aluminium producers to export semi finished aluminium products only to remelt them back into primary metal to be sold on the global market. There is, however, an expectation that these actions are set to decrease toward historical trends as the country cuts down on production and actions of market arbitrage tapper off.
"At current all-in prices, we assume around 53% or 14 million mt of production outside China is unprofitable and at risk of closure."
Source: Market review, UC RUSAL
Is the future to be gloomy?
Stakeholders in the aluminium market should be reassured by upcoming actions and long term trends, which are likely to provide a needed price boost in the near future. Many of the world's leading producers have agreed to gradually cut down production.
For instance, more than 300,000 tonnes of aluminium production have been cut globally in countries outside of China since the beginning of the year and another 300,000 to 500,000 tonnes are likely to be slashed in the fourth quarter of 2015, as over a half of the aluminium production in markets excluding China are currently under water.
Aluminium capacity closures in China have also begun, albeit at a very modest pace. It is expected however as the country embarks on a new 5 year economic plan in 2016, that market forces within the aluminium sector will be given a greater price adjusting role.
For instance, more than 300,000 tonnes of aluminium production have been cut globally in countries outside of China since the beginning of the year and another 300,000 to 500,000 tonnes are likely to be slashed in the fourth quarter of 2015, as over a half of the aluminium production in markets excluding China are currently under water.
Aluminium capacity closures in China have also begun, albeit at a very modest pace. It is expected however as the country embarks on a new 5 year economic plan in 2016, that market forces within the aluminium sector will be given a greater price adjusting role.
As for the long term, all trend analysis seems to indicate an even more robust price growth in the coming years. Aluminium remains the integral metal for vital house appliances and transport vehicles. It is also used extensively in many high growth high tech sectors such as computer processors, among others. While emerging countries are currently undergoing a period of economic stagnation and reform, robust global growth will return and with it the strong demand for one of the world's most valued metals.