Rusal elaborates on aluminium industry trends for the first nine months of 2015

Global aluminium market trends in the first nine months of 2015

• Global aluminium demand grew by 5.6% in the first nine months (“9m”) 2015 year-on-year (“YoY”). Demand growth in North America, India, Middle East and the EU compensated for a contraction in demand from Japan, Russia and South America.
• With the commissioning of new capacity in the Middle East and India, production outside of China grew by 2.2% in YoY in 9m 2015.
• China continues to increase new operating capacity whilst subsidizing existing loss making smelters. While 2.5 million tonnes of capacity has been cut year-to-date (“YTD”), 3.0 million tonnes of new capacity has been commissioned and 616 ktpy of operating capacities were resumed.
• Chinese net exports of semis rose by 29.4% YoY in 9m 2015 but fell to a lower YTD monthly level due to low price arbitrage. It is expected that Chinese semis exports will return to the historical trend.
• The global aluminium market entered into a surplus of 373,000 tonnes in 2015 as a result of weak demand in various emerging markets and in some Asian countries compounded by the increase in the Chinese semis exports.

Aluminium demand

In 9m 2015, global aluminium demand rose by 5.6% to 43.4 million tonnes. Demand growth in North America, India, Middle East and the EU compensated a contraction in demand from Japan, Russia and South America.

North American demand for aluminium rose by 4.2% YoY in 9m 2015. Demand continues to be driven by the transportation sector. From January to September of 2015, North American automakers built 13.5 million vehicles, an increase of 3.2% compared to the same period in 2014.

Aluminium demand in Europe improved in 9m 2015 growing by 2.1% YoY compared to 9m 2014. The biggest rise came from Turkey (5.9%), Italy (1.9%) and France (1.3%).

In September 2015, the EU passenger car market experienced another strong month of growth (9.8%), marking the 25th consecutive month of growth. Demand for new passenger cars was up in all major markets, driven by ongoing scrappage schemes and the economic recovery in Southern Europe. In 9m 2015, new passenger car registrations increased 8.8% YoY, surpassing approximately 10 million units. All major markets posted growth, contributing to the overall upturn of the EU market over the first three quarters of the year. Spain (22.4%) and Italy (15.3%) benefited from strong growth and posted double-digit percentage gains, followed by the UK (7.1%), France (6.3%) and Germany (5.5%).

Aluminium demand growth in developing South East Asian countries is estimated to increase by 3.1% in 9m 2015 YoY. However, in consideration of the whole of South East Asia, including Japan and South Korea, the region experienced a lower increase in overall aluminium demand (0.2%), mainly due to a decrease in Japan (-5.6%), the region’s biggest individual market. The slowdown in the Chinese economy, ASEAN’s largest trading partner, has dampened economic growth in the region. In Japan, the production of capital goods and consumer durables both fell for the second successive month since July 2015 and production of motor vehicles in the first eight months of the year was down by 7.6% compared to the same period in 2014.

In August, domestic automotive sales in South Korea grew by 3.6% over a year to 121,127 units, led by the effects of new models and a robust demand for SUVs and minivans. Car production in August rose 4.3% over a year to 284,803 units, helped by an increase in domestic sales.

Primary aluminium consumption in India grew by 3.4% during the first quarter (“1Q”) to the third quarter (“3Q”) of 2015 compared to the same period in 2014. Aluminium conductor and cable business in India showed a strong recovery throughout 2015 and has been the key driver of aluminium product demand in India.

Primary aluminium demand is growing in the Middle East, led by Saudi Arabia and the United Arab Emirates, where new downstream facilities are ramping up. Regional demand grew by 6.4% during 1Q to 3Q 2015 compared to the same period in 2014.

China’s apparent primary aluminium consumption was 22.72 million tonnes in 9m 2015, up by 9.8% YoY. Q3 GDP growth on a yearly basis was better than expected, reaching 6.9%. In 2015, the industrial production growth slowed to 5.7% YoY in September from 6.1% in August, while the PMI for production activity in China in September was 49.8 points, up from 49.7 points in the previous month, which was below expectations, pointing to weaker 2H 2015 economic growth. Therefore, aluminium consumption growth has already slowed in Q3 to 8.7% YoY as compared to 10.5% YoY growth in the preceding quarter.

RUSAL has slightly reduced its initial global aluminium demand growth forecast from 6% to 5.6%, or 58 million tonnes, for the whole of 2015, due to weaker demand in various emerging markets and weak demand in some Asian countries.

Aluminium supply

International Aluminium Institute (“IAI”) and CRU data shows that aluminium production ex-China grew by 415,000 tonnes, or 2.2% YoY to 19.592 million tonnes in 9m 2015. Growth mainly came from Asia and the Middle East, whilst South and North America led the decline in production.

The aluminium all-in price has declined by 27% since the beginning of 2015, to USD1,666 per tonne at the end of September 2015, resulting in around 9 million tonnes of production outside of China is unprofitable.

At current all-in prices, we assume around 53% or 14 million tonnes of ex-China production is unprofitable and at risk of closure. More than 300,000 tonnes of production was cut since the beginning of this year and another 300,000 to 500,000 tonnes will be closed in the fourth quarter (“4Q”) of 2015.

From January to September 2015, Chinese installed aluminium capacity rose by 2.45 million tonnes to 37.7 million tonnes. Around 3.0 million tonnes per year (“TPY”) of operating capacity was commissioned and around 616,000 TPY was resumed during the same period. This created additional supply pressures in domestic markets, which resulted in a 10.2% decrease in the Shanghai Future Exchange (“SHFE”) price during 9m 2015. The decline in the SHFE price continued throughout October 2015, with the price slumping 19.0% on a YTD basis. As a result about 50% (more than 70% with the price at the end of October 2015) of Chinese aluminium production capacity, or 15.7 million tonnes, was loss-making at an average SHFE price in September 2015 of RMB 11,824 per tonne.

Aluminum capacity closures in China continued at a slow pace despite extremely low domestic aluminum prices and heavy losses due to regional authority subsidisation. We expect rapid closures early in 2016 with the onset of a new five year development plan.