More production cuts needed for Aluminum price recovery

The aluminum price briefly touched a three-year low of $ 1,827.25 per ton on the London Metal Exchange (LME) last week.

It managed to avoid falling off a technical cliff, just, but the pressure is still on, three-month metal already trading as low as $1,830 in early trading yesterday.

Analysts are near unanimous in their collective view that a significant price recovery will need more producer cutbacks to rebalance supply with demand.

Superficially at least, they will be heartened by the latest set of global production figures released on Monday by the International Aluminium Institute (IAI).

These showed global run-rates falling by an annualized 940,000 tons in July relative to June.

However, there is still little evidence that producers either in China or the rest of the world are yet ready to bite the collective bullet in a way that would satisfy the market.

It’s important to put last month’s drop in global output into context, following as it did all-time record production of 45.2 million tons annualized in June.

Moreover, most of the July fall in production came from China, where annualized run-rates fell by 826,000 tons.

It was the first decline in the country’s output since March and follows a cumulative 2.1-million ton increase over the course of April, May and June.

There’s no denying the pain being felt by local producers. The country’s largest, Aluminum Corp. of China (Chalco), has just flagged a first-half net loss of 3.25 billion yuan ($ 510.8m).

But whether that pain is now translating into producer discipline is another issue.

Chinese production of the light metal has fallen in July relative to June in three of the last four years. That suggests that the latest decline could be primarily seasonal rather than structural.

Proof either way will only come with the next couple of months’ figures.

But the underlying issue is that market forces, namely the low price, are being counteracted by non-market forces, namely government subsidy.

Analysts at AZ China, for example, estimate that provincial governments are propping up around a quarter of domestic production, something like five million tons annualized, through power subsidies. Moreover, the idea of central government support is back on the agenda, smelters lobbying for a revival of a scheme to buy up surplus metal.

Outside of China aluminum production has been on a gently declining path for several months. Production in July slipped by another 110,000 tons to 24.6 million tons annualized, bringing the cumulative drop to 1.3 million tons since October 2011, when the aluminum price first started moving into cost-curve territory.

What is frustrating aluminum bulls is the lack of new “news” about production cuts. There have only been two developments over the last month and neither of them is going to set the aluminum world on fire. Outside of China aluminum producers are being kept afloat not by government subsidy, although there are specific examples, but by investment demand for metal. Stocks financiers still seem to have an almost unlimited appetite for buying short-dated aluminum to earn profit on the forward curve.

It seems very unlikely, bar an unexpected rebound in global manufacturing activity, that the aluminum price can stage any sustained upside move without a more fundamental realignment of fundamentals.