Half of world’s aluminium smelters not profitable, price could fall below $1 200/t

About half of the world’s aluminium smelters were not profitable, and continued price pressure would force more smelters offline in the face of a price that could fall as low as $1 200/t, a report by BofA Merrill Lynch Global Research has found.

Aluminium prices had continued trading lower in recent weeks, falling below $1 500/t on Thursday.

“In our view, the recent dynamic is testament to the ongoing challenging fundamental backdrop. This has perhaps been most visible in the reluctance of China’s aluminium producers to curtail output; in fact, partially supported by subsidies, the country’s smelters have increasingly delivered into the deficits created by production discipline from smelters in [the rest of the world],” the global commodities research team reported.

BofA believed that sharply higher Chinese shipments were partially the result of inflated physical premiums through 2013/14. While China’s aluminium exports had now stabilised somewhat, headwinds to aluminium quotations might persist in the near-term, especially if some market participants released working capital and dumped unreported stocks into London Metals Exchange warehouses, the analysts said.

“In this scenario, which we believe is possible, aluminium may fall to $1 200/t and premia could reach negative levels,” the team warned. The bank noted that low prices had historically prompted production curtailments. According to BofA, there were two possible scenarios that could play out to rebalance the market.

In the first, larger operators with a diversified portfolio would be pressured to shutter individual loss-making sites. Meanwhile, smaller companies had less scope to optimise operating assets, giving rise to the risk that they might emerge from the bear market in a different shape, as exemplified by Century Aluminium issuing federal Working Adjustment and Retraining Notification Act (WARN) notices to workers at the Mt Holly smelter.

By incorporating announced and highly probable production cuts into its supply and demand model, BofA saw a roughly balanced aluminium market in 2016, which should ultimately prevent a complete meltdown in quotations; yet, surpluses started building again from 2017 onwards. “The bottom line is that aluminium remains a structurally challenged market and more capacity closures are essential; indeed, if all capacity that was marginal at $1 700/t was cut, aluminium would be in good shape fundamentally,” researchers found.