Demand-supply mismatch might push up aluminium prices   

October 21, 2010

Growing demand — both domestic and global — and China’s decision to curb output will impact prices of the metal

Global aluminium prices are likely to go up in the wake of growing demand at domestic and international fronts, coupled with China's step to slash production of the metal. According to Harbor Intelligence, a global consulting firm specialising in forecasts for commodities, aluminium prices could touch $2,700 per tonne in the first half of the next year.

But inventory levels and demand for aluminium will be the determining factor for prices. In the last month, inventories of the metal have dropped by 1.7% to 72,050 tonnes. However, after the continuous decline in the second week of October, London Metal Exchange (LME) inventories grew by 3,950 tonnes to 4.3MT.

BL Bagra, director, National Aluminium Company Limited (NALCO), in a recent interview, has said that due to low interest rates and warehouse charges, many companies have found it profitable to hold on to stocks. He also added that interest rates will be stable and large aluminium inventories will be seen till at least the beginning of 2011.

"Currently aluminium prices are about $2,300 per tonne which is slightly on (the) higher side," an analyst with Systematix Shares & Stock (I) Ltd told Moneylife, preferring anonymity. "I don't see prices going significantly up," he added.

Alcoa, the largest US aluminium producer, predicts that global aluminium demand will increase by 6% per year over the next decade.

Inventories of aluminium at the LME are steady at around 4.5 million tonnes (MT), which is much more than last year's inventories, shows LME data. Taking note of rising inventories, Alcoa curtailed its production by 20% to 25% in June.

According to Brook Hunt, a leading research firm, global oversupply of aluminium is seen at 1.5MT and 2.1MT in 2011 and 2012, respectively. Supply is set to exceed demand by 1.3MT this year and supply should match demand, at least in the next two years, added the firm.

"Inventory level in the global market is around 10MT-11MT and global aluminium consumption is somewhere close to 35MT... it means about 30% (of) yearly consumption is lagging in inventories," added the analyst from Systematix.

India's demand for aluminium is likely to grow in double-digits in the coming months as the metal's main consumers - the auto and construction sectors - are seeing high demand for their products. India's aluminium production in April-August rose 6.4% to 6,52,941 tonnes.

"Aluminium prices may show a slight drop in the short-term if the dollar is firm," said an analyst from a Mumbai-based research firm. "A weak dollar may push up prices of aluminium as it makes the base metal more attractive to non-dollar buyers," he added.

China's recent energy rationalisation programme would cut aluminium production in the country. Essence Securities Co has said that aluminium companies in Shanxi and Guizhou, which account for 6% of China's production, were told to cut capacity for four months.

The policy is being implemented in every part of China, says Essence. According to media reports, China's Jiaozuo Wanfang Aluminium Manufacturing plans to cut electrolytic aluminium capacity by 1,40,000 tonnes due to electricity shortages. The company produces 4,20,000 tonnes of aluminium every year.

Aluminum Corporation of China, China's largest aluminium producer, also says that supply would be more than demand and it expects global aluminium production to grow by 12% to 42.28MT this year, and consumption to grow by 20% to 41MT.

"China consumes 40% of global aluminium production. If Chinese companies are slashing their output significantly, then it will help Indian aluminium production," added the analyst who spoke to Moneylife.

Despite decline in profit in 2009-10, Indian aluminium major NALCO plans a Rs 6,000 crore capacity expansion project. With this expansion, the company would enhance aluminium capacity to 5.7 lakh tonnes and alumina capacity to 29 lakh tonnes. The company sees surge in demand from the auto sector and infrastructure activities in India, Europe and other countries.  

However, Vedanta group's Sterlite Industries, which has contributed considerably to enhance India's aluminium production over the past few years, has put its expansion plan on hold following the environment ministry's order banning bauxite mining in the Niyamgiri hills, Orissa. The company has also decided to defer the start of its aluminium smelter capacity of 1.64MT per annum (mtpa).

Vedanta Resources had committed an investment of over Rs36,000 crore for the expansion project in Orissa.

 — Sharad Matade