VANCOUVER (miningweekly.com) – New analysis by Bank of America Merrill Lynch’s (BofAML’s) Global Commodity Research team sees no alternative but for China to cut back production (temporary) and capacity (permanent) to rebalance the global market.
While aluminium has been the best performing base metal since the start of the year, gaining about 8% year-to-date on the back of a rebalancing global market, which has been mirrored in stable global reported and unreported inventories, trends in global inventories have masked a remarkable divergence of regional fundamentals: most notably, surpluses and rising inventories in China have offset deficits and falling stocks in the rest of the world, excluding China.
In addition, announcements of production and capacity curtailments in China have also been priced in.
“Indeed, fundamentals on the Chinese market have been so weak that the country's smelters could have almost justified sending primary aluminium abroad, despite a 15% export tax,” the analysts stated.
London Metals Exchange (LME) aluminium prices rose after former US President Barack Obama complained to the World Trade Organisation that China's government paid illegal subsidies to the nation's aluminium industry.
Shortly after, China's authorities started consulting with smelters on pollution, announcing seasonal cuts in northern China during the winter months. Further, the government is also looking to tackle illegal capacity both at operating smelters and sites that are currently under construction.
Nevertheless, concerns have risen over the resolve of the authorities to implement these curtailments. “To pick a few issues, shuttering aluminium smelters temporarily is difficult. By the same token, Xinjiang announced illegal capacity at three of the smelters in the province, but subsequently removed the announcement from the public domain.
“There is no alternative to production discipline in China,” BofAML stated.
Until some of this uncertainty is resolved through the second half of the year, there is a high risk that aluminium prices (and premiums) may give back some of the recent gains. BofAML ascribed this as the main reason for maintaining its third-quarter price forecast of $1 700/t (77c/lb).
“Having said that, we see no alternative to production discipline in China; indeed, if the country's smelters increased production as planned, the global market would be oversupplied to the tune of almost five-million tonnes a year between 2018 and 2020.
“Beyond that, it is worth noting that the US is fostering its investigation into aluminium imports; also, companies including ARG, Alcoa and Century are all considering restarting smelters,” BofAML advised.