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Global aluminium market surplus in 2013 is expected to be at 1 mn ton from 1.2 mn ton previously estimated as Chinese market has moved into a modest deficit in Q2, driven by production cuts amounting to as much as 1Mty capacity by mid-May, stated London based Barclays in its recent market analysis.
Secondly, aggressive consumer hedging activity sub- $1,900/t has provided some buying support, while there has also been some short covering of investor positions. This is another supportive factor for Barclays forecast.
Will this fundamental tightening in the Chinese market be sustained into second half of this year? The bank is sceptical of the longevity of this dynamic.
Feedback to Barclays recent trip to China suggested that provinces hardest hit by smelter cuts in Q1, namely Guangxi and Inner Mongolia, have started offering subsidies which could bring the idled capacity back online by mid-year.
Moreover, in terms of the build out of capacity in Xinjiang province, it has generally been observed that bottlenecks have been overcome; rail capacity is to be expanded by year end and water is not an issue.
Record semis output in March, combined with an open import arbitrage window, point to significantly stronger demand in Q2 versus Q1.
In terms of supply-side developments ex-China, Alcoa announced that it will spend the next 15 months reviewing a total of 460Kty of their highest cost smelting capacity for closure if prices do not recover.
Until such cuts are made, obviously, there is no impact on the market balance or, importantly, on prices. Supply rationing remains painfully slow in the aluminium market ex-China – record physical premiums have played a part in this whilst there are also significant closure costs and political hurdles, which mean such decisions are not simply based on margin.
