CRU Group’s main points at Aluminium Düsseldorf and LME Week
22 October 2018 by Goran Djukanovic
This year, both Aluminium Düsseldorf, and LME Week’s annual gathering in London, were scheduled for the second week of October, with most events taking place within the span of just four days (October 8-11). Below are some of the main conclusions from the presentation given by CRU analysts Greg Wittbecker (CRU Breakfast, LME Week in London) and Ben Thomas (at Aluminium Dusseldorf).
CRU Breakfast – Greg Wittbecker
CRU expects a healthy global economic growth rate of 2.9% in 2019. This reflects its expectation of a managed slowdown in China, a growing US economy as a result of the effects of the 2018 tax cuts, as well as solid economic performance in Europe and Japan. The alumina market is projected to be in deficit in 2019 given the supply declines it expects from most sources, with the notable exception of African supplies. Chinese alumina exports seem to be tiding the market over for now, but China itself should revert back to balance as smelting production grows.
Concerning primary aluminium supply, Chinese winter cuts will take some aluminium capacity off the market this year, but this year’s cuts will likely be smaller than last year’s because cuts will be decided by local governments, based on regional emission levels. CRU thinks that supply-side reforms have been more influential than winter cuts in trimming Chinese production, as output has been slashed by roughly 3 million tonnes over the past two years.
In terms of aluminium inventories, LME stocks have been declining sharply over the past 2 to 3 years, with holdings now well below the 1 million tonnes. CRU believes that “hidden stocks’’ rumoured to be held off exchange in massive quantities have likely shrunk as well, particularly in light of soaring premiums and are not going to be enough to cushion any sustained rally.
CRU estimates that only 420,000 tonnes of additional primary aluminium will come on stream in U.S. since the U.S. import tariffs were enacted. Given the additional US$ 2.4 billion of additional tariff costs borne by the US consumers, CRU calculates that this extra U.S. production is basically coming in at costs of roughly US$ 5700/tonne. Another consequence of the U.S. – China trade war is that it has “killed” the flow of scrap between the two countries. China imported 620,000 tonnes of the stuff in 2017.
Chinese aluminium exports are expected to surge in coming months and next year after Beijing boosted tax rebates as part of a package to soften the impact of its trade war with the United States. China recently increased its rebate on value added tax (VAT) for exports of semi-fabricated aluminium or semis to 16 % from 13 %.
That will consequently increase exports of both legitimate semis as well as so-called “fake semis”, which have been transformed from primary metal just enough to escape China’s export tax on unwrought metal and instead qualify for a VAT tax rebate. These “fake semis” are later mostly remelted by the end user. Fake semis have already been showing up in South Korea, Thailand and Malaysia.
CRU expects exports of semis will rise significantly over the course of the next year and could approach 800,000 tonnes in 2019.
CRU estimates that some 40% of world aluminium smelters are losing money and although this argues for selective closures, produces are reluctant to go that route given the expensive proposition this involves.
Demand for aluminium in the world in 2019 will grow by 3.6% while supply growth is projected at 4.7%. Currently the market is in deficit. Aluminium smelting operating costs will increase by 1% in 2019. CRU expects LME aluminium price to average US$ 2256/tonne in 2019.
Aluminium Düsseldorf – Ben Thomas
The aluminium price has experienced record levels of volatility in last three years, with U.S. and China being the main contributors. The main causes are: winter capacity closures in China, supply-side reforms in China, and U.S. sanctions against UC Rusal.
Since the start of the century, China’s aluminium exports have surged from around 1% of ex China global demand to around 10% in 2018. During the same period, US aluminium imports from China rose from just above 0% to over 6% of total US demand. In 2016, US implemented anti- dumping import taxes on aluminium foil and sheet ranging between 48% and 167%, which were further compounded by Section 232 tariffs of 10% import. The joint effect of the two duties is that aluminium imports from China are expected to fall significantly.
Regarding alumina markets, a number of disruptions have recently happened: winter closures in China, the Alunorte capacity closure, the UC Rusal sanctions, and the strike at Alcoa’s refineries in Australia in August.
The alumina price experienced extreme volatility this year, rising from a historical average of around 17% of the 3-month LME aluminium price to nearly 30% in early September. However, after the Alunorte settlement was agreed, the alumina price has been falling ,reaching levels of below US$ 500 /tonne.
CRU expects that the global primary aluminium market deficit to reach a record level of nearly 2 million tonnes in 2018. Global ex-China aluminium stocks depletion accelerates and will fall further, from around 70 weeks of consumption in Q4 2018 to below 60 weeks, by Q3 2019. Chinese stocks will also fall, from around 55 weeks of consumption at the end of 2018 to just above 40 weeks by Q2 2019.
Concerning aluminium smelters cash costs, CRU said that around 40% of world smelters were losing money at the end of September, for an LME price just above US$ 2000/t and the alumina price around US$ 600/t. Smelter production costs range between US$ 1200/t to over US$ 2700/t.
CRU concluded that investment in aluminium smelters outside China is very low. Capex in smelters in 2016 amounted to under US$ 1 billion, compared to nearly US$ 7 billion in 2013. Confirmed investments in next five years are also low (around US$ 1.5 billion in 2019 and then below US$ 1 billion/year by 2022). However, investments could surpass US$ 3 billion both in 2020 and 2021.
To support investments in aluminium smelters, the aluminium price needs to increase. CRU expects the LME aluminium price to continuously and steadily grow in following years, hitting around US$ 2450/t by 2022.
China has drastically changed its approach to the aluminium sector, particularly in the supply policy. The U.S. policy on UC Rusal, and trade wars will set the general tenor of aluminium prices, with high volatility expected if UC Rusal sanctions remain in place. Finally, the only way to secure investments in aluminium smelting in future is if the aluminium price rises.