Chinese driven aluminium overhang to foil price bulls

A massive overhang of aluminium stocks, mostly due to rising Chinese production, is set to cap a tentative price recovery triggered by large output cuts.

Last year plummeting prices and squeezed margins led to production cuts of around 5.5 million tonnes with the bulk, about 4 million tonnes, in China. Benchmark aluminium on the London Metal Exchange hit $1,432.50 a tonne last November, the lowest since May 2009.

Prices of the metal used in transport and packaging have since recovered to around $1,500 a tonne, but a stronger rally may only encourage producers to restart idled output capacity. Large surpluses are due to a ramp-up in China, which accounted for nearly 55 percent of global supplies of around 57 million tonnes last year.

"We think prices will stay around the $1,400/$1,500 level, that's low enough to force more supply cuts in China," said CRU's head of aluminium Marco Georgiou. "For a price rally we need to see exports from China falling and for inventories to come down, a process which could take many years," Georgiou said.

With total reported and unreported stocks of about 15 million tonnes, chances of a price rally are thin, particularly given higher supplies from China. Part of the reason is investment in low-cost capacity. Analysts in China estimate total costs of new smelters in the remote region of Xinjiang to be below 10,000 yuan, possibly the lowest in China.

Chinese producers have also been able to negotiate better deals for power supplies. Up to 40 percent of aluminium smelting costs globally are accounted for by power. In China it is said to vary between 25 and 35 percent. Production costs around the world are generally estimated at between $1,000 and $1,600.

The China Nonferrous Metals Industry Association in late 2015 estimated total aluminium production costs in China at an average around 12,000 yuan ($1,841) per tonne. Aluminium on the Shanghai Futures Exchange is around 11,000 yuan.

The latest Reuters survey showed the aluminium market in surplus by 392,000 tonnes this year. Norsk Hydro, one of the world's largest aluminium producers, cut its 2016 forecast for global demand growth to 3-4 percent from 4-5 percent, its chief executive Svein Richard Brandtzaeg told Reuters last week.

"Global aluminum production increased by 9 percent last year, compared to 4 percent growth in demand," JPMorgan said. "Chinese aluminum production is expected to increase by 1.4 million tonnes this year, as projects in the West of China continue to ramp up." ($1 = 6.5197 Chinese yuan renminbi)