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Uncertainty in global aluminium market, limited price upside: BNP Paribas


There is a large amount of uncertainty in the global aluminium market with limited upside for prices, BNP Paribas metals analyst Stephen Briggs said Thursday.

Briggs said that the market is in a large structural surplus and that it is unlikely to move back into balance in the near-term.

"The market will remain in large structural surplus unless the Indonesia-China production chain breaks down, and it is hard to see cutbacks being sufficient to significantly erode excess stocks," Briggs said.

Briggs notes that there has already been a significant number of production cuts and closures this year outside of China, notably by producers such as Alcoa, Ormet, Rio Tinto and Rusal.

"Further cuts are likely, given that over 60% of the industry has cash costs above the current LME price... with premiums now shielding producers less than in H1 13," he said.

However, Briggs expects China to restart some of its curtailed production with new capacity also ramping up across the country.

"We expect world production to rise by well over 4% this year, and much deeper cutbacks will be needed to prevent faster growth in 2014," Briggs said.

Likewise, the recent proposal by the London Metal Exchange is unlikely to offer any short term relief for aluminium prices.

On July 1 the LME announced the launch of a three-month consultation period on a proposal under which warehouses with queues of more than 100 calendar days would be subject to new requirements to ensure they deliver out more metal than they take in.

The LME board is set to make a final decision in October and the measures will take effect in April 2014 if implemented.

"We expect the LME's proposal to address warehouse queues to lead to further falls in physical premiums, although they may take some years to return to historically normal levels," Briggs said.

However, Briggs notes that there could be unintended consequences as a result of the proposal.

He said that there could be a rush to exit by warehouse stock financiers, and that this could potentially flood the market and cause abrupt falls in both price and premiums.

On the other hand, queues at other LME warehouses could build, or players might struggle to warrant metal, causing some temporary tightness.

BNP Paribas is forecasting the LME aluminium cash price to average $1,895/mt in the fourth quarter of 2013.

The bank is forecasting an average LME cash price of $1,910/mt in 2013 and an average price of of $2,000/mt in 2014.

Source: Platts