Aluminium: plainly weak

This article was prepared by Macquarie's Commodities Strategists for LME Week 2019.

24 October 2019

Last year, we experienced numerous shocks to the supply of aluminium – mainly from Rusal’s sanctions and Alunorte’s forced closure. This has given way to 2019's more conventional price-driving themes. Relentless China-centric supply and capacity growth, deteriorating global demand growth and a collapse in the key input costs to alumina and power have characterised this year’s market.

As a result, aluminium's price has been fundamentally capped this year – a condition aided by the trade conflict that has impacted most industrial metals and the commodity trade at large.

60 per cent of the global aluminium supply is sourced in China which is also undergoing industry-related policy shifts and events, all of which are among the most important value-driving factors. Until 2019, China's industry policy was mostly bullish for aluminium's global price outlook with the central government appearing determined to restrict capacity growth by– closing unauthorised new capacity; closing inefficient capacity; and, policing a capacity-'swap' programme.

However, while industry reform succeeded in boosting the quality of China's total capacity, it failed to fully restrict its growth. China's total capacity has expanded at 5 per cent per year during 2016-19 and looks set to expand further by 2020 to almost 50 million tonnes per annum (Mtpa) – even though China claims it will cap capacity at 45-46Mtpa.

The collapse in the cost of aluminium’s key inputs – alumina and power – in the last six to 12 months, has motivated members of China’s smelter industry to lift the rate of production.

"At the start of 2019, over 50 per cent of the global market was loss-making: we estimate that this fell to just 20 per cent by mid-year. "

Right now, the global market awaits a pullback in China's robust semis exports following a strong 2018. China's exports have bearishly lifted year-to-date, despite still-weakening global demand.

What’s next?

For 2020, we forecast the global aluminium market to return to a small surplus, as supply growth outstrips demand growth - a surplus that is set to persist over the medium-term. Forecast margins should improve incrementally from 2022, on a sustained global economic recovery, boosting activity in aluminium’s key end-use sectors of property, auto and machinery – consequently tightening the market, and providing greater price support in the long run.