Supply glut puts pressure on aluminium

Aluminium prices show few signs of recovering as the world remains in a glut of the lightweight metal used in cars and cans.

The price of the metal has fallen 11 per cent in the past 24 days to $1,758 a tonne on the London Metal Exchange. That is below the metal's average price of more than $2,000 since 2010. Premiums, the extra cost paid for delivery and transport, have also fallen, hurting global producers of the metal.

Countries are failing to cut aluminium capacity even as Chinese exports of the metal continue to rise. As a result, the price of the metal could continue to fall until it forces capacity reductions from outside China, according to analysts.

"We have 3m tonnes of capacity outside China losing money at the moment," said Eoin Dinsmore, an analyst at consultancy CRU. "Some producers are starting to feel the pressure."

Excess supply has kept aluminium in a so-called contango structure, with future prices higher than current spot ones, indicating weak demand.

Goldman Sachs forecasts that an "all-in" price, including premiums, will need to be at or below $1,875 in order to put pressure on ex-China producers — not far off today's price.

The global average cash cost of producing primary aluminium before casting stands at $1,730 per tonne today, down from $2,150 per tonne in early 2011, according to Harbor Aluminum, an analysis company.

Chinese producers have been helped by lower electricity prices in the country that has enabled them to cut costs.

China exported about 410,000 tonnes of aluminium and aluminium products in May, an increase of 21 per cent compared to the previous year.

China Hongqiao, a private aluminium company, said this week it expected to record a "significant increase" in consolidated profit for the six months ending June. The company's shares have risen 46 per cent so far this year.

In a statement to the Hong Kong stock exchange, the company said it has increased margins and reduced its unit production costs due to lower prices for coal as well as a rise in self-supplied power. Hongqiao purchases alumina and power from Gaoxin Aluminum & Power, a local state-owned energy company.

But as prices fall lower, Chinese producers are also likely to feel more pain. About 10 per cent of the country's producers are estimated to be making a loss and inventories of the metal are piling up.

"The Chinese producers are under the most pain, you will see higher closures — but you're not going to see exports drop to zero and boom times in the LME," Mr Dinsmore said.