Outlook 2017: How will primary aluminium fare in the New Year; who would be the prime players

2016 has been a positive year for primary aluminium after a long period of volatility. LME aluminium prices recovered 13.4% in 2016 ending the year with a rate of USD 1714 per ton. The market sentiment on aluminium has improved considerably since the beginning of 2016, when prices hovered at a range of USD 1466 to USD 1500 per ton. Falling supply in China with the closure of capacity and demand growth as the result of China’s infrastructure initiatives supported the price throughout the year.

Premiums also settled after falling constantly over the last two years. It’s important to note that aluminum premiums fell steeply in 2015, negatively affecting aluminum producers’ performances. Though we saw some recovery in premiums toward the end of 2016, they’re still far below their 2015 highs.

We are trying to give an overall outlook for the industry covering the major areas and the top primary producers that can bring about a change in the aluminium industry in 2017.

LME and SME Aluminium Outlook

To begin 2017, LME aluminium prices inched higher in January to hit US$1812 per ton, with the U.S. dollar retreating and traders waiting for getting clarity on the aluminium market.  LME aluminium prices are also driven by aluminium prices in China market. In China, end-user consumption is still growing, but the growth has slowed down. Currently, aluminium prices in China are getting support from rising input costs like alumina and coal prices. But, it is not a long term situation and the price situation would be dependent on the support from end user demand and also on extra capacity addition by Chinese producers. Chinese aluminium industry takes up about 60% of global aluminium market, given that, the weight of influences on LME aluminium from SHFE aluminium has exceeded 50%.
 
SMM expects the most active SHFE aluminium to be moving between 11,500-14,500 yuan/tonne in 2017, with a core range at 12,500-13,500 yuan/tonne and average price settling at around 13,000 yuan. Price movement will also be driven by input costs. Spot aluminum prices in domestic market will move between 12,000-15,000 yuan/tonne. High spot premiums are expected to narrow to zero or even turn into discounts in 2017.

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As predicted during SMM Summit 2016, china aluminium supplies would shift into surplus in 2017. China’s aluminium market was in supply deficit in 2016 as most of the producers closed down loss making units. SMM expects China’s aluminium output and consumption to grow 10.06% and 6.09%, respectively in 2017. Aluminium inventories will be filled up rapidly since output growth will surpass consumption growth. This is again expected to put pressure on aluminium prices.

According to an SMM forecast LME aluminium will be moving within a range of $1,500-1,800/tonne in 2017. Volatility would remain a concern for traders attempting to assess how the market will evolve as the year progresses. U.S. dollar forecast for 2017 by a few investing firms indicates an upturn for the currency.  Prices of aluminium and all other metals typically follow an inverse relationship with the value of the U.S. dollar. When the dollar strengthens against other major currencies, aluminium prices tend to drop and vice versa. Under such circumstance, this might be a factor which could pull down the aluminium prices in 2017. 

Donald Levit, an analyst for the Economic Calendar, said: “Even though it is typical for aluminum prices to retreat in late fall and winter, prices held steady through mid-December after Donald Trump won the U.S. presidential election in November. Trump made a campaign promise to move to further stimulate the U.S. economy, and that stimulus could potentially include infrastructure spending. That would boost aluminum demand.”

Bullish Automotive and Aerospace Demand 

Automotive industry is a key driver of aluminium demand and the auto sales in US and China (the world’s biggest car market) finished the year on a strong note and is expected to remain bullish in 2017. This would be a supporting factor for aluminium prices in 2017. Aluminium prices are expected to get a strong support from the aerospace industry too as more and more aircraft OEMs are resorting to aluminium alloys for manufacturing lighter and stronger aerospace parts.

Movers and Shakers

Integrated aluminium producers are expected to see a rise in earnings in 2017 due to high alumina prices. Alcoa was the top alumina producer in 2016, with a strong first-quarter cost position on the global cost curve.

2016 was an eventful year for Alcoa (AA) as the company split into two entities: Alcoa and Arconic (ARNC) in November. Alcoa now houses the Legacy Upstream business and competes with other primary producers like Century Aluminum,  Norsk Hydro, Rio Tinto and Nalco.  Alcoa has seen upward price action since its listing.

For Alcoa, commodity prices would remain a key performance driver in 2017. Alcoa expects its annual EBITDA to rise $233 million for every $100-per-metric-ton rise in aluminium prices and it is expected to fall $233 million for every $100-per-metric-ton fall in aluminium prices. Similarly, Alcoa’s annual EBITDA is expected to rise or fall $63 million for every $10-per-metric-ton rise or fall in alumina prices.

Aluminum Corporation of China Ltd (Chalco) swung back to profitability in the first nine months of 2016, buoyed by higher metal prices and continued cost-cutting efforts. The second-largest aluminium producer in China, Chalco accounts for just under a quarter of the country's alumina output and over 10% of its aluminium output. The company is expected to be benefited in 2017 too if the alumina/aluminium prices stay bullish.

Rio Tinto Aluminium holds the position of the highest margin aluminium business globally. The company is continuing with initiatives to reduce costs and increase productivity in the aluminium segment in 2017. For the year 2017, Rio Tinto’s expected share of production for bauxite has increased to 48 to 50 million tonnes. For alumina and aluminium the share stands at 8.0 to 8.2 million tonnes and 3.7 million tonnes respectively.

Emirates Global Aluminium (EGA) in UAE is the top primary aluminium producer in GCC and it is also among the five largest aluminium producers in the world. EGA shipped their first lots of bauxite from their Guinea mine in December and the first phase of its Al Taweelah Alumina refinery is expected to be commissioned during the second quarter of 2017. Al Taweelah Alumina has a design capacity of 2.0 million tonnes per annum, which will meet 75% of EMAL’s annual alumina requirements and this is expected to be a path breaking development for the company.  

National Aluminium Company (Nalco), the world's second lowest cost producer of alumina is expected to benefit from the rising alumina price.  The CMD of the company says Nalco will surpass its production capacity of 6.82 million tonne (mt) and will achieve 7.32 mt production in FY 2016-17. Considering the company’s 18% growth in bauxite and alumina production in the current fiscal and its further expansion plans, the year 2017 has a bright outlook for the company.

Hydro forecasts a healthy demand growth for aluminium and is sticking to their forecast for global aluminium demand growth of 4-5 percent for FY 2016. The company expects to remain profitable in 2017 with increased bauxite production. 

Most of the aluminium producers are still awaiting the fourth quarter results before giving their outlook for FY 2017-2018. We hope to come up with a more detailed outlook for FY 2017, once the fourth quarter and full year results are out.  

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