Alcoa’s 2016 aluminium forecast upbeat, but it all depends on China

Alcoa Inc.’s upbeat forecast for global aluminium supply and demand in 2016 is bullish. The world’s third largest aluminium company had said in November that it expects a deficit (demand exceeds supply) to the extent of 360,000 tonnes. Along with its fourth quarter results, the company on Tuesday announced an increase in its deficit forecast to 1.2 million tonnes (mt).

How did Alcoa arrive at this number? It expects global consumption to rise by 6% in 2016, with China’s demand growing by 8% and rest of the world by 4%. That’s an aggressive forecast, considering the troubles in emerging markets, especially in China, which has a 51.6% share in the 2016 consumption estimate. In 2016, Alcoa expects 4.4 mt of additional production from new or restarted projects too. But crucially, it expects 3.2 mt of capacity to be cut, with a major share of 2.4 mt of cuts to take place in Chinese territory.

A large part of the work in achieving this deficit, therefore, hinges on China. So, where’s the catch? China’s economic data in recent months has been weakening, raising fears it may slow down further. That is a risk to its appetite for metals. The curtailments hinge on the government nudging old and unviable plants to shut down. News of some cuts appeared recently, but whether they reach this magnitude remains to be seen. If prices stabilize, that may even give an incentive to keep working. Currency devaluation too could give them more incentive to export.

Aluminium prices continue to be weak, but metal premiums—paid for timely delivery—are stabilizing in the developed world. That bears watching. An uptrend could support Alcoa’s forecast and signal better times for aluminium producers. That and progress in shuttering of Chinese aluminium plants bear watching in the near-to-medium term. Imagine what will happen if the new capacity gets added as expected, but the curtailments don’t go through.