– A closer look at Reuters’ aluminium price poll
– The price outlook remains positive despite temporary fall expected in the Q3
Analysts are pretty divided when it comes to the direction aluminium prices will go in the second half of the year. They can be split into two groups: on one hand, those who expect China’s government to seriously tackle the air pollution issue and, on the other, those who do not expect significant repercussions on aluminium production and prices, even with Beijing’s measures in force. Put another way, analysts either think that the measures would amount to production cuts, or that China’s aluminium oversupply will cancel out any potential production cuts.
The Chinese Ministry of the Environment (MOE) has ordered aluminium smelters in 28 cities in the northern part of the country to cut 30% of their capacity over the winter heating months (November through March). The ministry indicated that each city will undergo around 25 rounds of inspections throughout the year until March 2018.
The aluminium price averaged US$ 1870/tonne for the first four months of this year (January-April), or €1756/tonne. The latest LME aluminium price finished the week up at US$ 1887/ tonne on Friday, May 12, from US$ 1870 on Wednesday, May 10.
Aluminium premiums decreased slightly at the end of April and the beginning of May, to US$110-115/tonne duty unpaid and US$145-155/tonne for duty paid in Europe. In U.S. the Midwest premium is 9.5 cents/pound (US$ 210 /tonne), while aluminium buyers in Japan will pay a premium for their second-quarter metal deliveries of US$128 per tonne. This represents an increase from the US$95 negotiated for first-quarter shipments. It is also the highest premium since the second quarter of 2015.
In the latest Reuters base metals poll, conducted in April and published at the beginning of May, analysts have significantly increased the aluminium price forecasts for this and next year, compared to the previous poll conducted in January. While in January the average forecast by 29 analysts for the 2017 aluminium cash LME price was US$1687.2/tonne, the average forecast from April increased to US$1835.6/tonne (30 analysts).The highest forecast in January was US$1808/tonne and the lowest US$ 1600 /tonne. The highest forecast from April poll was US$1953/tonne (by JP Morgan) and the lowest US$1719.6/tonne (Liberum Capital).
Aside of JP Morgan, analysts from the following banks/institutions had forecast in the April poll average aluminium prices above US$1900/tonne: Bank of America – Merrill Lynch, Citigroup, EIU, GFMS, Goldman Sachs and Intesa San Paolo (representing ”bulls”). Those who were less optimistic, with forecasts below US$1800/tonnes were: CIBC, Commerzbank, Deutsche Bank, Julius Baer, Macquarie Group, Natixis, SP Angel & Co and Standard Chartered (in the role of ”bears” this time).
The average forecast price for 2018 also increased, from US$1698.2/tonne (in the January poll) to US$1820/tonne (in the April poll). The range in January poll was between US$1494/tonne and US$1874/tonne (26 analysts), while in the April poll forecast (29 analysts) stood between US$1543/tonne (Liberum Capital) and US$ 2000 /tonne (Intesa San Paolo).
As for aluminium production surplus/deficit forecast, analysts were even more divided, with estimates ranging from a deficit of 1.4 million tonnes to a surplus of 837,000 tonnes in 2017 (April poll). As for 2018, the highest forecast deficit was 700,000 tonnes and the highest surplus 1.35 million tonnes.
The CRU’s recent 22nd World Aluminium Conference (May 3-5, London) also showed sharp divisions in the views of analysts and speakers. CRU’s director Paul Robinson wrote in a report: ”I attended CRU Group’s World Aluminium Conference this morning to listen to the Prices and Premium session. Speakers from Citi Research, Goldman Sachs, Macquarie, Eurasian Resources Group and CRU Group shared their views. Panellists could not agree on short-term aluminium price prospects. Views ranged from below US$ 1,800/t to over US$ 1,900/t with price spikes. There was, however, consensus on the medium term outlook with all panellists seeing some upside if winter cuts and supply side reforms take place in China’’.
“In the very short term we are quite bearish on aluminium due to stocks & arbitrage opportunities,” said Vivienne Lloyd, from Macquarie Bank, at the conference.
CRU does not expect significant cuts in China’s aluminium production this year and it too has become ‘’more bearish for the second half of 2017’’.The company expects aluminium price to average US$ 1830 /tonne this year.
Despite firm confirmations by Chinese government and environment protection authorities that production cuts starting from October 15 will take place in several provinces, not everyone is completely convinced by it.
However, what most of these sceptical (bearish) analysts are failing to see is that the cuts will not affect just the planned aluminium production but also the overall production of alumina, pet coke /anodes and other inputs. Secondly, due to the lower output of coal power plants, which are also targeted by the cuts, higher electricity costs and lower electricity supplies could also result in lower aluminium production. Consequently, the real reduction of aluminium production may turn out much higher than the figures proposed by the government. If this occurs it may give a big support to the aluminium price in 2018, knowing that every subsequent winter may bring even more challenges to smelters in order to remain operational.
In North America, president’s Trump intentions to implement taxes on aluminium imports will not necessarily influence the LME aluminium price in this year.
The question is whether uncertainty over China will keep the price relatively high or it will decrease in the meantime, before rebounding in the last quarter of the year, as a reaction to the implementation of production cuts. But there are several other scenarios, including one where China’s smelters will actually step up production, before being ordered to cut production in the last quarter of the year. This, with seasonally lower demand and trading activity during the summer months, may result in lower purchases by investment funds and a lower Al price consequently in Q3. However, unexpected situations that would keep the price elevated during the summer are not excluded either. The author (who is also a participant in Reuters base metals poll) expects aluminium prices to fall in Q3 compared to the current level, before sharply increasing sometime in the fourth quarter, very likely surpassing US$2000/tonne. For the whole of 2017, the price will average in the range US$1850-1900/tonne in 2017.