China holds all the cards in aluminium

Global aluminium consumption in 2014 rose by 9% and not 7% that Alcoa Inc, the biggest US producer, had earlier estimated. China was the chief culprit for this gap as its actual consumption was higher by 1.3 million tonnes (mt). In 2015, the global aluminium consumption is expected to increase by 6.5%, lower than the 7% projected in Alcoa’s January estimate.

The lower growth is not worrying because it can be attributed to a higher base. Aluminium consumption in 2015 is pegged at 57.5 mt now, instead of 56.4 mt earlier. That increase is due to an upward revision by Alcoa, the world’s third largest aluminium producer, in China’s aluminium consumption.

Ordinarily, higher consumption should be good for producers as it could mean higher prices. But the China factor pops up again. Although it is consuming more, its smelters are producing more of the metal. In January, Alcoa had predicted that demand would fall short of supply by 38,000 tonnes. It was a small deficit, pointing more to a balanced market. This has now shifted to a wholesome surplus of 326,000 tonnes. However, China’s demand and supply numbers could change substantially by the end of the year.

Prices are a more reliable indicator of ground reality. While spot prices of aluminium have been flat in 2015 so far, metal premiums have been falling. Buyers pay this premium to get quicker delivery. While, premiums in Japan and midwest America have fallen by 6-7%, in Europe they are down by 12%. It indicates weakness in the market, which is bad news for producers.

Indian metal producers will also be hit by lower realizations, as the rupee’s strength gives them no protection. One bright spot is the prospect of higher output, due to coal field auctions, renewal of leases and the forthcoming auctions of bauxite mines. Not only does it secure their future but higher output, even if at lower margins, could translate to higher sales growth and, eventually, profit growth.