UC Rusal: Whistling in the Falling Aluminum Price’s Wind

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Several recent news articles have led with comments made by UC Rusal executives regarding the price of aluminum. The FT led with Rusal battles with LME on aluminum price and Reuters added Rusal plays down concerns of Chinese aluminum flooding market.

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All of which says to me, Rusal is worried sick that a combination of falling physical delivery premiums and rising Chinese product exports are going to depress aluminum prices this year and into the medium term. The fact is, there is no shortage of aluminum and, although demand continues to grow robustly, supply is growing faster.

Primary Producers Opening New Capacity

Mills such as Rusal’s and Alcoa, Inc.‘s have manfully responded by closing older, less-efficient, higher-cost capacity but even so both they, and other primary producers, are investing in new capacity at the same time. Production outside of China has been creeping higher over the last five months.

Reuters’ Andy Home tells us it’s creeping up to the tune of an annualized 650,000 metric tons. Part of this is older European plants being purchased and restarted by smaller players. Part is new capacity such as Alcoa’s Ma’aden joint venture plant in Saudi Arabia. Likewise, while Rusal has closed older, higher-cost plants it is now talking about a ramp up of it’s 600,000-mt per year Boguchansk plant in Siberia, although, admittedly, only the first 150,000 mt phase for next year.

Semi-Finished, Completely Sold and Shipped

Meanwhile, China exported 1.07 million mt of mostly semi-finished products in the first quarter of this year, representing a year-on-year increase of 353,000 mt. Although December’s almost 500,000 mt was an outlier, the removal of a 13% export tax on May 1st and the consideration of further tariff reductions signals that Beijing has no intention of reining in this overcapacity, but rather is setting course to support domestic producers as domestic demand slows.

Rusal may talk about primary product as if it is separate from semis, but in truth it isn’t. That primary demand is partially for the production of semis China is in the process of replacing. To the extent that Chinese semi shipments rise, production will be displaced in the US, Europe and elsewhere in Asia.

Physical delivery premiums have already tumbled in the US, down nearly half to around $0.12 per lb. or $265 per mt for two months out. Primary metal is flooding into the US, from Canada, Europe, even India and the strong dollar is hindering US producers’ ability to export semi-finished and finished products. However much Rusal may like to talk up the market, I wouldn’t be going long on aluminum at present. Primary or semis.

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