Long-Term Outlook For Aluminum Bright

There now seems little doubt that July will prove to be the low point for primary aluminum production within the International Aluminum Institute’s (IAI) reporting area. Output (excluding China) in October rose for the third consecutive month to 63,400 tonnes per day (tpd), up from a revised 63,200 tpd in September. Production in the first 10 months of the year totalled 1.97 million tonnes, down 10.2% from the same period of 2008, reflecting the impact of capacity cuts implemented by producers from the middle of last year. This resulted in nine consecutive months of decline in the daily operating rate to a low of 62,900 tpd in July.

But the impact of these cuts began to dissipate into the second half of this year as producers refrained from implementing further reductions to output against a backdrop of significantly higher prices. Moreover, a combination of new capacity coming onstream and the restart of mothballed capacity has raised production in recent months. In all of the IAI’s reporting regions, output has stabilized or is rising.

It will increase further in the short or medium term, particularly in Asia, following the buildup to full capacity of the new Oman smelter, expansions at several plants in India owned by Hindalco Industries and Vedanta Resources and the phased startup of greenfield smelters in Abu Dhabi (Emal) in December, and Qatar (Qatalum) in April 2010.

Capacity restarts will boost production further. Privately held Noranda Aluminum intends to restart the third of three potlines at its New Madrid smelter, in Missouri, which was damaged by a storm in late January, it said in October. This followed an announcement by Birac of Bosnia that it had raised output at its Mostar smelter to pre-financial crisis levels of 50% of capacity. Although the impact of such developments will be limited in the near term, it would be no surprise to see other producers restarting capacity if prices remain around current levels.

The rate of increase in Chinese output in recent months has been spectacular. Having bottomed out at 28,000 tpd in March, the operating rate has risen every month since then. Having surged in September, the operating rate did so again in October, setting a new record of 41,700 tpd, according to the latest figures published separately by the IAI. Despite attempts by Chinese authorities to constrain growth in aluminum output, there is little doubt that production will continue to increase in the months and years ahead.

Global production will decline almost 7% this year to 38 million tonnes, we estimate, before rebounding to around 40 million tonnes in 2010. Even if there is a significant upturn in demand next year, it is hard to escape the conclusion that the market will record another significant surplus.

How this continuing imbalance will be rectified remains to be seen.

But the longer-term outlook for aluminum remains sound. Although global stocks are high, a large proportion of LME stocks are tied up in finance arrangements and are therefore not freely available in the near term.

Further increases in stock next year may trigger a price correction and more supply cuts, but the combination of restocking in the Organisation for Economic Co-operation and Development (OECD) and a pickup in real consumption could prompt a fast drawdown in stocks once a sustainable global recovery starts.

After all, with aluminum a 40- million-tonne-per-year market, a 10% recovery in apparent demand (restocking and actual consumption) would raise demand by 4 million tonnes per year. As such, when a recovery does emerge, the stock drawdown is likely to be quite rapid and new smelter capacity is then likely to be employed fairly quickly. So although there may be some need for prices to correct in the short-to-medium term, the long-term outlook remains brighter.

— The author is the head of research at BaseMetals.com,a metal-focused online market data system committed to providing the best quality news and analysis, alongside full data coverage of the worldwide base metals markets. To request a free trial, or

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