Aluminum heading for 'significant' deficit in 2014 on production cuts - Barclays

The aluminum market has finally turned a corner after years of being in surplus, according to Barclays Capital.

"The pace of supply rationing ex-China is enough to drive a small but nonetheless significant global market deficit in 2014," Barclays analyst Nicholas Snowdon wrote in a note.

For the past five years, the aluminum market has been described as 'structurally over supplied', but production cuts have already pushed the market into a deficit this year and this will get bigger in 2014 provided all the cuts are implemented, according to Snowdon.

The global market balance will shift into a 275,000t deficit this year for the first time since 2006-07, according to Snowdon. In mid-2013, Barclays had been forecasting a 1.2Mt surplus.

The "critical shift" has been on the supply side ex-China. "The LME warehouse rules proposed in July 2013 (and confirmed in November) catalyzed a near 15% drop in US and European physical premiums," Snowdon wrote. "Combined with a similar fall in LME prices since the beginning of the year, an additional 1.7Mt smelting capacity ex-China fell into loss making territory on top of 1Mt/year capacity already in such a state at the beginning of the year."

Between July and November of this year, companies announced production curtailments of 1.4Mt/year. Data from the International Aluminium Institute (IAI) is already showing the effects of these cuts. In its most recent production release, the IAI reported a 3% fall in October year-on-year output to 65,000t/d in the world ex-China which is the lowest monthly daily production rate since February 2010.

The real impact of the closures will be fully felt next year, according to Snowdon.

Barclays is forecasting an average price of US$1,838/t in 2014. "Given 4.5Mt of metal in LME warehouses and a minimum 2Mt held off-warrant ex-China, there is a pre-existing buffer that limits any immediate upside traction in prices," Snowdon said.

An additional risk is that higher prices could also spur production restarts.

"But if the downward trend in premiums resumes from Q2 as the new LME rules kick in as we expect, the risks are skewed to further production cuts and bouts of tightness in LME time spreads," Snowdon said.

Aluminum closed Monday at US$1,699.50/t cash on the London Metal Exchange. Aluminum averaged US$1,749/t on the LME in November, its lowest monthly average so far this year.

Argentina, Brazil and Venezuela are the only producers of primary aluminum in Latin America.