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CRU, global producers point at continuing aluminum deficit
Excess inventory build-up could be erased by 2020-21
CRU, a commodity-focused global analytical firm, recently hosted a call highlighting its
view on the aluminum market trends. It expects the aluminum market to remain in deficit
in 2019 on account of (a) the lack of new investments and (b) the closures of illegal Chinese
capacity, despite muted demand expectations (ex-China: <1% growth). Furthermore,
inventory (in days of consumption) is trending down toward the 2007 levels. According to
CRU, LME prices will have to increase to ~USD2,200/t for new smelters to be economical.
We note that global aluminum producers (Alcoa, Rusal and Hydro) have also maintained a
similar stance. With continuing deficit and lower inventory days, LME prices are likely to
increase over the medium term. This would be positive for Nalco and Hindalco.
Smelter investments at historical low
Aluminum smelter capex outside China has been at historical lows, given the
low LME prices. CRU noted that upcoming capacities by Rusal would require
LME prices of ~US2,200/t for their viability. Besides, planned smelting
capacities, such as that in Vietnam, are facing financing issues, given the low
LME prices (currently at ~USD1,750).
CRU highlighted that a few capacities outside of China have permanently closed
due to low LME prices and higher operating cost. In fact, aluminum production
outside of China has not grown over the last five years, even as demand has
The analytical firm also highlighted that the smelters in Australia and some parts
of Europe would come under pressure at LME prices of USD1,650-1,700.
Further, if section 232 of tariffs were to be done away, the plants restarted in
the US would no longer be profitable.
New smelter investments in China have also become difficult due to supply-side
reforms and environment initiatives. About 4-5mt of illegal smelting capacity
was closed in China. New capacities can only be built by replacing old plants.
Rusal notes that regulator actions like winter cuts, capping on coal consumption,
the launch of the national carbon market and the shutdown of capacities that
breach the environment norms will create barriers for unreasonable new
capacity addition in China.
Chinese operating smelter capacities have not grown over the last two years,
despite new ramp-ups (Exhibit 1)
CRU noted that China’s aluminum demand will increase by ~0.9mt annually,
even after building in the likelihood of weaker demand. China will need new
smelter capacities by mid-2020s, according to CRU.
Inventory days continue declining
CRU noted that inventories in days of consumption have fallen to the pre-global
financial crisis (GFC) levels. The period since GFC saw a sharp build-up in
inventory as production continued but demand took a hit.
Dhruv Muchhal – Research Analyst
(Dhruv.Muchhal@MotilalOswal.com); +91 22 6129 1549
– Research Analyst
(Aniket.Mittal@MotilalOswal.com); +91 22 6129 1572
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
14 June 2019
Investors are advised to refer through important disclosures made at the last page of the Research Report.