Rusal Sees Flat Aluminum Market For the Next 3 Years

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A recent report by Reuters quoted comments from UC Rusal Deputy Chief Executive Oleg Mukhamedshin at London Metal Exchange Week saying the world’s largest producer did not intend to bring any idled production back onstream for the next 3 years and expected its production to remain flat for the period.

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Weak prices, even with the hefty physical delivery premium added on top of the LME price, are not enough to encourage Rusal to restart their older, less-efficient potlines. Indeed, they are now so high-cost that they may never be restarted with the company preferring to bring new, more-efficient plants into operation. Mukhamedshin said the company could add 150,000 tons of capacity by the end of next year with a new project. Although the firm has been the most vocal among western producers in recent years, calling for production cuts and indeed has cut production by 12% or 650,000 tons since 2012, it has largely closed older, inefficient potlines and upgraded others to partially replace them.

Rusal is predicting that strong global growth and reduced western supply will push the market into a deficit of 1.4 million tons this year and 1.3 million tons in 2015 followed by 1.1 million tons in 2016.

Mukhamedshin observed that China, on the other hand, is in surplus but, shielded by strong domestic demand and restricted by a 15% export tariff, China’s surplus had not impacted the rest of the world. He went on to dismiss Chinese over-production as a threat to world prices but that may be oversimplifying matters.

As a ThomsonReuters article explains, production outside China has declined by almost 1.5 million tons over the last year while consumption has continued to grow. But in China, production has grown by an annualized 7.2 million tons over the same time frame. Although demand growth has been robust it has tailed off this year as evidenced by imports collapsing over the last 2 months and the significant underperformance of Shanghai aluminum prices relative to those on the LME according to Reuters’ Andy Home.

A lot of metal is leaking out of China as semi-finished product, both legitimate exports supported by a lower SHFE primary prices and suspect materials being exported to be remelted and used essentially as primary metal.

As China’s surplus increases, the pressure to move metal in this way will rise putting pressure on western producers hoping to secure better prices as primary metal becomes more scarce. This is to the benefit of consumers as it will slow price increases although arguably as the volumes are not yet enough to depress global prices significantly. China’s September semi-finished exports were 340,000 tons and rising at 10% per year. That must be displacing western producers sales in markets where Chinese sales penetration has been most marked. Certainly they are having an impact in much of Asia and increasingly in Europe.

So Rusal’s prediction that western world prices and production will remain flat for the foreseeable future may be as much an acknowledgment of the massive on- and off-warrant primary metal stocks overhanging the market as a nod to the growing exports of Chinese material depressing the market.

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