As LME aluminum prices have risen by 18% since early March, a timely announcement by Hydro Aluminium of Norway came out this week to quell any fears among aluminum consumers that capacity cutbacks would eventually bring the market into supply/demand balance and push up prices to levels seen last year. Qatalum, a $5.6 billion smelter joint venture between Qatar and Norway’s Norsk Hydro is due to come on stream in the 4th quarter and begin deliveries in the early New Year according to Reuters. The smelter will add 585,000 metric tons of capacity onto the world market, just ahead of Saudi Arabia’s Ma’adan project which is due to bring 650-750,000 metric tons of new capacity on stream in 2012 according to latest projections. At the same time, Abu Dhabi’s EMAL project is set to begin production in 2010 for the first stage of what will become the world’s largest aluminum smelter at 1.4 million metric tons. As western producers try to idle older capacity in face of a 3.5 million ton stock overhang, Chinese smelters are busy bringing idled capacity back online.
Bloomberg reports 600,000 metric tons has come back on stream in Henan province alone this month with another 800,000 metric tons to be brought back on line over the next 3-6 months. Chinese smelters are being aggressively encouraged by state and federal authorities to restart up to 3 million tons of idled capacity by offers of cheap loans, tax cuts and reduced power costs. On the demand side, the SRB has purchased 590,000 tons with plans to push this to 1 million tons. The State Grid has bought 400,000 tons and provincial governments have indicated they will buy up to 900,000 tons according to Macquarie Bank.
This mix of incentives and buying will probably have the desired effect and production will increase. But this metal is largely going into stock not consumption, so the medium to long term prognosis is the increase in production from idled plants and new smelters coming on stream will prevent aluminum rising far or fast for the next few years. Good news for consumers burned in the 2007/8 bull market that resulted in product substitution and demand destruction in traditional applications. And if lower and more stable prices help an earlier return to growth I expect we would all welcome that outcome.