United Company Rusal, the world’s largest aluminum producer, is in the midst of refinancing some $10 billion of debt, 70% of which has been completed with Russian banks but a remaining $3.6 billion of syndicated debt is still in the process of negotiation.
They are hardly going to post a pessimistic quarterly report, but even in spite of posting a loss of $325 million in the first quarter of 2014 compared with a profit of $19 million in the year-earlier period, the accompanying commentary suggested, in Rusal’s opinion, that global demand and industry cutbacks would converge to support prices later this year.
More Aluminum Growth
Rusal expects global demand for aluminum to maintain its growth trend, increasing by 6% to 55 million tons in 2014, with growth of 10% in China, 5% in North America and 2.5% in Europe. At the same time, the producer sees global capacity cutbacks finally beginning to bite with Rusal’s own output dropping further. In 2013 the firm slashed output by 8% to 3.9 mt and expects that to continue in 2014 to 3.5 mt, according to a report in the WSJ.
In the wider market, Rusal points to Chinese production and while acknowledging the migration from higher-cost seaborne smelters to lower-cost inland smelters, particularly in western provinces rich in low-cost coal reserves, it still expects some 3 mt of Chinese capacity to be cut as a result of low prices. This may be overly optimistic, but Rusal’s expectation that the Chinese market will remain broadly in balance is probably correct. Not that Chinese primary exports have been featured in the international market in recent years.
High export tariffs have kept the Chinese supply market contained and whilst Chinese demand is widely expected to continue to grow, slowing growth in the wider economy will limit additional demand.
Rusal further states they see cutbacks of 1.5-1.6 mt of primary aluminum production in the wider global market during 2014 resulting in 2013’s deficit of 300,000 tons rising to 1.2 mt in 2014, a Reuters article reports. That would suggest, if Rusal is correct, that physical delivery premiums will remain at elevated levels throughout 2014. Although LME load out queues have declined at most warehouse locations – Glencore’s being the principal exception – industry buyers have long since given up on using LME inventory as a source of supply, so whether there are queues or no queues, physical delivery premiums are likely to remain as consumers compete with financiers for metal supply in a deficit world.