Alcoa ups aluminium output estimate, bearish for prices

Alcoa Inc.’s revised outlook for aluminium in 2015 comes close on the heels of a sharp fall in metal prices. Aluminium on the London Metal Exchange (LME) has fallen 15.3% since a year ago and by 6% since 1 June. Alcoa’s results for the June quarter reflect the impact of falling prices, although the company benefited from productivity gains.

Alcoa’s outlook for aluminium is more interesting for Indian investors. There is good and bad news. The demand growth forecast for 2015 is held steady at 6.5%. And aluminium inventory is down at 62 days at the end of the June quarter compared with 66 days in the preceding quarter. But this did nothing to prevent prices from falling during the quarter.

The bad news is on the supply-demand balance. The surplus in the aluminium market is projected at 762,000 tonnes in 2015, at least double the earlier forecast of 326,000 tonnes issued in April. China is the main offender, with its rising output belying expectations that falling prices will make some of its older plants unviable. Alcoa’s management attributed this to metal that is being exported as semi-finished products, to evade the 15% export tax on primary aluminium.

Regional metal premiums are down too. These premiums are paid over the LME-linked price, for timely delivery. Average premiums were down 26% year-on-year in Europe, by 23% in Japan and 18% in Mid-West US. They are down sequentially as well. Alcoa’s management believes premiums in Europe and the US may have stabilized at lower levels, but Asia continues to look weak.

Alcoa has not announced new production cuts. If other aluminium firms follow suit, then non-Chinese production will remain unchanged. A higher surplus will keep up the pressure on prices and weaker Asian metal premiums can affect Indian companies more. That leaves productivity gains and lower operational costs as possible vehicles to improve performance. Alcoa’s outlook confirms that times will remain tough for Indian aluminium producers such as Vedanta Ltd and Hindalco Industries Ltd.