Flood of Chinese exports sinks aluminium prices

The outlook for aluminium is looking severely pressured for the next few years as excess capacity in China shows no sign of easing, resulting in a more downbeat outlook for Australian-listed miners Rio Tinto, South32 and Alumina.

Last week, Macquarie took the knife to its aluminium price forecasts to the end of the decade, while Macquarie and UBS cut their forecasts for alumina, the main ingredient in aluminium.

“Unlike most commodities, aluminium supply continues to grow at a rapid pace,” Macquarie said in a note to clients.

“With Chinese exports now likely to play a sustained and growing role in the global market in future years, the whole market has been radically altered.”

Macquarie slashed its 2016 to 2020 forecasts by 10 to 20 per cent and is not expecting prices (now at near six-year lows of $US1700 a tonne) to average more than $US1800 in any year until the end of the decade.

For alumina, second-half ­prices have been cut from a range of between $US350 and $US380 a tonne to between $US325 and $US350 a tonne.

“Chinese (aluminium) production now sits at 31.3 million tonnes a year, up 16 per cent year-on-year, and with about 6 million tonnes of capacity growth still in the pipeline, it is fair to say the aluminium market remains and will continue to remain dominated by Chinese growth,” Macquarie said.

“This has cause significant structural changes in the aluminium industry, which has unwound the producer optimism seen through 2014.”

The cuts have wiped about $US5 billion off Macquarie’s value for Rio’s aluminium unit, which it now values at $US12.2bn. Because of Rio’s size, this has only resulted in a 3 per cent drop in the target price to $63 (the shares closed at $52.50 on Friday).

“The outlook for iron ore prices has become even more significant for Rio on the back of these changes, and given our expectation of further declines in iron ore prices in the near term, we retain our cautious view on Rio,” the bank said.

Macquarie has cut is rating on Alumina from outperform to neutral after a 26 per cent cut in its target price to $1.70 (it closed at Friday at $1.47).

UBS trimmed its target by 10c to $1.90 after cutting earnings for this year and next by 10 per cent and 23 per cent respectively because of lower alumina prices.

For South32, which was spun out of BHP Billiton in May, Macquarie cut its target price by 14 per cent to $2.20 but left its outperform rating intact, given prices closed on Friday at $1.79.

“With the share price down nearly 30 per cent from its peak in late May, we believe much of the weakness (in alumina and aluminium) has been factored in to South32,” the bank said.