Global aluminium market looks well supplied: JP Morgan

The global aluminium market looks very well supplied. On the surface, JP Morgan projects primary demand will be 53.1m tonnes in 2014, implying the stock-to-use coverage on the London Metals exchange is 14 weeks or more. Nevertheless, a closer look at the fundamentals reveals a sharp divergence in the balance of aluminium stocks according to region. Generally, a surplus forecast for China in 2014 masks a forecast deficit elsewhere. JP Morgan observes local deficits are particularly steep in the US, Japan and Europe, all of which compete for the same supply from the Middle East and Africa.

Outside of China the latest data show production declines were most severe in Europe but also output was lower in 2013 in South America, Oceania and Asia ex-China. Capacity closures keep coming too. JP Morgan has adjusted production forecasts to allow for smelter closures but, with more capacity closures in Australia and South Africa in the near term, the forecast may require further adjustments over the next three months. The analysts note Brazil has a strong impetus to demand for construction for the upcoming World Cup and Olympics but has experienced an acute shortage of primary aluminum, while the US market has been in structural deficit for some time and is becoming more and more dependent on scrap and imports. Moreover, even though China has a domestic surplus it is still is a net importer of aluminium, signalling there are areas even within that country of scarcity and abundance.

JP Morgan expects the primary flow of the metal will continue to come from regions which have a cost advantage, such as the Middle East and Africa. The analysts expect rising aluminium premiums to be sustained in order to maintain international trade flows to consuming regions but believes production growth, ample inventory and a structural downward trend in global operating costs may eventually take a toll on pricing.