Bearish aluminum market piles pressure on world’s biggest smelters

The world’s biggest aluminum makers will be under even more pressure to make deeper production cuts and stave off a price slump that saw the metal trade near its lowest level in six years on Wednesday.

China, which accounts for half of the world’s aluminum output, is on pace to export record amounts of metal products this year, helping to deepen a worldwide glut. Producers outside China, including Alcoa Inc. and United Co. Rusal, had already cut back capacity through last year. Still, 1 million metric tons more, enough to supply Japan for six months, will probably be curtailed within a year, according to Macquarie Group Ltd.

China’s economy is poised to grow at its slowest pace in a quarter of century. As the country shifts toward a consumer-driven economy, more of its processed aluminum is making its way overseas, inflating supplies. Additionally, China scrapped export duties on some products in April, adding to concerns the glut will widen.

“The aluminum price is going to be pretty horrible for a while, until we see some western world production cuts,” David Wilson, an analyst at Citigroup Inc. in London, said by phone.

The trend echoes a similar one in steel in the second half of last year, when Chinese exports of excess supplies sent prices tumbling 30 percent. The nation’s aluminum industry quadrupled in the past decade with smelters churning out record amounts of the metal used in everything from packaging to car bumpers.

Bear Market Aluminum for delivery in three months on the London Metal Exchange fell 1.7 percent on Tuesday to $1,666 a metric ton, entering a bear market. The metal extended its decline to $1,655 on Wednesday. Prices may trade closer to $1,500 a ton by the end of the year, the lowest since 2009, amid record inventories worldwide, according to Colin Hamilton, London-based head of commodities research at Macquarie.

About 20 percent of smelters outside China are losing money at current prices, according to Standard Chartered Plc.

Global supplies will exceed demand by 800,000 tons this year, with the surplus tripling from 2014, according to Societe Generale SA. While global aluminum demand is poised to rise by the most among the six main industrial metals, Chinese production is already up 16 percent this year and expected to grow further, according to Macquarie.

Stockpiles of the metal are also easier to obtain after the London Metal Exchange took steps to cut lengthy wait times at its warehouse locations. The backlogs that stretched to almost two years had boosted surcharges added to the exchange benchmark to a record last year, helping producers’ profits.

Capacity Cuts Moscow-based Rusal, the largest producer, forecasts that China will increase exports of partly processed aluminum by 20 percent, the company said June 25 in response to questions by Bloomberg News. It will decide whether to cut capacity in the third quarter.

Oslo-based Norsk Hydro ASA will take into account recent changes in Chinese exports “when we are deciding about our production capacity and projects going forward,” said Halvor Molland, a spokesman for Europe’s third-biggest aluminum producer.

Alcoa said June 30 it would permanently close its idle Pocos de Caldas aluminum smelter in Brazil reducing its smelting capacity. The largest U.S. producer declined to comment before the company reports second-quarter results Wednesday.

Aluminum’s price slump has hurt share prices and sapped earnings. Alcoa has tumbled 30 percent this year in New York as of Monday’s close. Shares of Rusal, the world’s largest producer, have dropped 36 percent in Hong Kong trading this year.

“It’s a very bleak future for aluminum producers outside China,” said Nicholas Snowdon, an analyst at Standard Chartered Plc. “Producers are going to bear the brunt of this effect from China. The slower they are to react to this reality, the longer the aluminum price will remain at these levels.”