LME aluminium spot prices may touch $2,050/t in second half of 2013

London Metal Exchange Aluminium spot prices would go higher in the second half of 2013, averaging $2,050/t versus $1,925/t in the first half, according to a market analysis by London based Barclays.

For short term, it could trigger some short covering in the metal, particularly if macro sentiments improve in line with developments in Europe.

Barclays has already expected the approaching maturity of the backwardation pockets in the LME curve to drive such activity, given the uncertainties regarding the underlying dynamics; hence, given some incremental tightening in fundamental expectations, the near-term risks of short covering are certainly escalating.

Barclays would not overplay the more sustainable bullish price prospects for the metal, not least because higher LME prices will likely reverse some of the cutbacks.

Global aluminium market is showing signs on the supply side of improving fundamental prospects. First and foremost, the past month has had 300-400Kty of primary smelting capacity being shut in, concentrated in Henan province in China.

This represents the first genuine constraint on Chinese primary production since the second half of 2011, when power cuts rationed supply at least temporarily.

This is important because it demonstrates that provincial governments have not necessarily delivered on the power subsidies announced mid-last year. While not affecting the ramp-up of close to 2.5Mty of new capacity in Xinjiang province this year (which largely has captive power generation), demonstrated in the record strength of February’s domestic output (23.5Mty, +15% y/y), it does draw into question assumptions about the stable production profile in the rest of the country.

Based on Brook Hunts cost figures, average SHFE cash prices this year point to close to 6% of domestic capacity (1.5Mty) in unprofitable territory that may be at risk. Second, Rusal has cut 300Kt from its output target for 2013 and suspended production this week at its 100Kty Alscon smelter in Nigeria due to a gas supply issue.

New Zealand Aluminium Smelters last week announced a small reduction in power levels at its 365Kty Tiwai Point smelter, lowering output 5%. Whilst the combination of these cuts (if fully lost over the year) would not fully overturn the 1.5Mt surplus Barclays last projected (which already had the 300Kt Rusal cut discounted in), it is certainly a long overdue shift in fundamental momentum in the aluminium market.