Too much metal

The aluminium market should be enjoying some better market conditions. The global economy is starting to point upwards after an extended slump. Even Europe, which had struggled economically more than most other regions, is finally coming out of its doldrums.

Unfortunately, aluminium markets continue to be hampered by a staggering oversupply of finished aluminium on the market.

The oversupply comes while end markets for the metal are perking up. The auto industry, one of the largest end markets for aluminium, has been fairly strong over the past several quarters in North America and China. Despite figures in late 2013 showing that auto production may be easing back, it still is healthy enough to soak up ample amounts of aluminium.

A number of scrap metal recyclers concur that demand from suppliers to the auto industry has been fairly robust, which has been a positive for the market.

The aerospace industry, another key end market for aluminium, also has been fairly healthy over the past several quarters, which has helped buoy aluminium markets.

Adding to what should be a better market environment for aluminium is the fact that demand for aluminium is growing as a substitute for other materials, including copper, steel and glass. The lightweight nature of the metal has great appeal for sectors that are looking for greater energy efficiency.

Despite these positives, there continues to be major structural problems with the market. Several sources say the first half of 2013 was one of the worst environments for aluminium in Europe, especially for secondary aluminium. The situation became so difficult that one of the largest secondary aluminium producers in Europe, Germany’s Oetinger, filed for bankruptcy protection. Along with the bankruptcy filing, the aluminium firm shuttered some of its facilities and removed around 70,000 tonnes of capacity from the market.

By the end of 2013 Oetinger was sold to the German private equity firm Orlando Management AG.

Reflecting the further difficulties with the aluminium market in Europe, in an article in a Polish newspaper, Grzegorz Stulgis, a member of the European aluminium firm Alumetal SA, says that despite the disappearance in the European market of 400,000 tonnes of production capacity during 2013, there continues to be excess capacity.
 

European auto sales

One challenge that is negatively impacting Europe is the lengthy decline in automobile sales. This sector is by far the most important consumer of secondary aluminium alloys. From 2007 to June 2013, the production of motor vehicles in the European Union declined by 20%. While it appears that the European automotive market started to stabilize by the middle of 2013, secondary aluminium markets continue to be pressured by primary aluminium prices, which are hovering around multi-year lows.

The biggest problem that aluminium is facing is the significant oversupply of the metal on the market. The World Bureau of Metal Statistics shows that during the first nine months of 2013 there was 1.23 million tonnes of supply on the market, which is up sharply from the prior year’s inventory of 539,000 tonnes.

With such a vast oversupply on the market, several sources say that close to half of all the aluminium produced is being made at a loss.

To compensate for the vast oversupply of aluminium, many top producers have slashed capacity as a way to bring supply and demand back into balance. Alcoa, Rusal and Rio Tinto Alcan, among others, have taken steps to either cut production or postpone or cancel proposed aluminium projects.

Rusal, the world’s largest aluminium producer, recently announced that its aluminium output for 2013 would be 9%, or 357,000 tonnes, lower than 2012 as it closed more expensive plants.

In the case of Rio Tinto Alcan, the move has been significant. Since acquiring Canada’s aluminium company Alcan in 2006, when commodity markets were at a record high, the company has seen a steady decline in the metal’s health.

Since 2009, Rio Tinto has shuttered around 600,000 tonnes of aluminium capacity. And, most recently the company received approval to sell some of its aluminium facilities in France to Germany’s Trimet and France’s Electricite de France S.A.

However, as painful as that was, the company’s aluminium sector has had to write down almost $30 billion because of the limited demand for the material. Adding to the problem, going forward Rio Tinto is cutting spending in its aluminium sector. It is shutting an alumina refinery in Australia, which follows the company’s decision to call off plans to divest its Pacific Aluminium business in light of the lack of interested parties. The company now plans to re-incorporate the Pacific Aluminium business back into Rio Tinto’s aluminium business.

These moves have had an impact. According to data from the International Aluminium Institute, daily production of the metal in the world outside China fell 4.1% between April and October to its lowest point since August 2010.
 

China's capacity

While cuts have been coming from many areas, another overarching problem is that China, which is responsible for about half of all global aluminium production, continues to expand its aluminium capacity, which more than makes up for the loss of aluminium in other parts of the world.

Along with China’s continued expansion of aluminium, new capacity has been increasing from the Middle East, which has the advantage of low energy costs.

So, while cuts are taking place in many areas of the world, the new capacity coming on line in China and the Middle East is more than compensating for the drops elsewhere.

In an article in the Wall Street Journal, Patricia Mohr, a commodity-market specialist at Bank of Nova Scotia, says that much of the new capacity coming online in China is on the lower part of the cost curve, which would mean that these producers could operate profitably even in the present market condition.

To correct the imbalance, analysts say that China needs to more aggressively cut its own aluminium smelting capacity. However, most analysts say they do not expect to see any significant cuts in China in the near term, which will keep prices toward the downside.

Sources who have expressed pessimism about the aluminium market point to the continuous oversupply of aluminium on the market. Reflecting this, despite wholesale shutdown of capacity by some of the largest producers (exempting China) global production continues to climb. According to the International Aluminium Institute, total production for October 2013 stands at 4.241 million tonnes, compared to figures from the same time in 2012 when production hit 4.066 million tonnes.

Will Adams, an analyst with the U.K.-based commodity research firm Fast Markets, says that aluminium markets will be challenging over the first portion of 2014. Like other analysts, he notes that a modest increase in demand is being overwhelmed by significant production levels that will likely dampen aluminium markets.

“Fundamentally, prices should head lower—we feel they will end up doing so—but for now the mechanics of the London Metals Exchange and abundant and cheap liquidity are enabling sufficient metal to be kept off-market to underpin the market’s price structure,” Adams writes.

Meanwhile, for those who are looking for some further direction, Adams adds there are numerous cross-currents at work that could bring about meaningful change. Overall, the demand outlook for aluminium remains second to none, but the market is in chronic oversupply as it has been for seven years, and market forces are likely to change that before too long.

The oversupply is coming despite significant cuts to production levels through most of the Western World.

Non-Chinese production cuts of 760,000 tonnes per year were announced in 2013 but this will be insufficient given that the market is already in a surplus and more capacity is being added, Adams says. New capacity outside of China is expected to increase some 600,000 tonnes per year in 2014, with EMAL ramping up output at its Al Taweelah smelter in Abu Dhabi ahead of schedule, Hindalco stepping up output at its 360,000-tonnes-per-year Mahan, India, smelter and the Ras Az Zawr smelter in Saudi Arabia also ramping up output from 237,000 tonnes in 2013 to 630,000 tonnes in 2014 and 740,000 tonnes in 2015.

Although China is cutting output—smelters agreed earlier this year to suspend 1 million tonnes per year of capacity, including 380,000 tonnes per year at Chalco, 150,000 tonnes per year at Yunan Aluminium and 120,000 tonnes per year at the Xinheng Group—these reductions are dwarfed by expansions. In 2014, an extra 3.86 million tonnes per year is scheduled to come on stream, leading many analysts to take a wait-and-see position on whether the government’s attempts to curb new capacity will be effective.

While many people are bearish on aluminium’s prospects, on the bullish side, longer term, Svein Richard Brandtzæg, president and CEO of the Norwegian aluminium producer Hydro, says that world aluminium demand outside China is estimated to grow 2% in 2013 and 2% to 4% in 2014. Aluminium fundamentals remain promising due to the metal’s many positive qualities, including its light weight and recyclability, and the global aluminium market is expected to show solid long-term growth of 4% to 6% annually over the next 10 years.
 

Uncertain U.S. fiscal policy

It is no secret that the U.S. economic recovery, as modest as it has been, is one reason for the uptick in aluminium demand. And, focusing more closely on the automotive sector’s success is one key reason for the turnaround. However, after many quarters of the U.S. Federal Reserve “priming the pump” through its quantitative easing policy of purchasing around $85 billion per year in bonds, the Federal Reserve has been sending signals that it may start backing away from the policy.

If this takes place, the days of low interest rates could end, resulting in a decline in auto sales, a large end market for aluminium, which could snuff out any momentum for the metal’s short-term usage.

There already have been preliminary signals that auto sales are starting to slow. And, added to the downturn in the housing sector, which also is a significant consumer of aluminium, the metal could see end markets ease up during the first part of 2014.

In his aluminium outlook Adams concludes that aluminium has generally been in a range-bound market with a slight downward bias, which will likely continue in 2014. “China and the U.S. remain the regional bright spots. Chinese production is ramping up rapidly, albeit regionally subsidized by energy deals and SRB support, [and] there is a danger of increased exports of semis. We have no quarrel with the outlook for aluminium demand but there is a risk that circumstances might change—should less metal be held off market, prices may fall,” Adams points out.

“Needless to say, falling prices are likely to lead to more pronounced cuts to output, which we feel the industry badly needs for the long term health of the industry. Although cuts would be a bullish sign, idle capacity would restart if prices were to rise too quickly before the excess inventory has been drawn down, so perhaps prices will hold down for longer than many in the market expect (if they expect lower prices at all),” Adams concludes.

The author is senior editor of Recycling Today Global Edition. Email him at dsandoval@gie.net.