Aluminum Outlook: Deficit to Come in 2014?

Aluminum Outlook: Deficit to Come in 2014?The aluminum market was hit with oversupply in 2013, which looks like it could have an impact on the market in the year to come.

Aluminum prices have reflected the market’s oversupply, hitting a low point late in 2013. Analysts differ in opinion over whether prices will remain depressed and the supply above demand – some believe a deficit will begin to form, or already exists. Therefore, the forecasts for 2014 vary greatly.

Aluminum in 2013

The later months of 2013 saw a surplus of aluminum, which led to a decline in prices. The benchmark price of aluminum was down 6.6 percent month-over-month in November, according to The Wall Street Journal, and 15 percent from January to November 2013. Investors bridled at plans that seem liable to increase that surplus, adding to overstocked warehouses and a vast global supply. In November, three-month aluminum on the London Metal Exchange fell to its lowest price point since July 2009. The price was similarly low in Asia. Analysts didn’t see reason to expect a rise in prices, and new regulations on the LME that dictate warehouses must ship more metal than they receive if their expected delivery times go over 50 days seem poised to harm aluminum the most. Theories abound on how these regulations will impact the market, but it will not be evident for some time.

In the first nine months of 2013, aluminum production exceeded demand by 1.2 million tons, according to figures from the World Bureau of Metal Statistics. This is double the surplus that existed for the entirety of 2012. However, aluminum consumers are not demanding more of the material. U.S. factory orders for durable goods fell in 2013, according to the Commerce Department. Durable goods, or those products expected to last three years or more, use aluminum in many cases, such as cars and airplanes.

If prices fall further, it may “prompt producers to cut back output,” Barclays analyst Sijin Cheng told the Journal, “and ultimately we may see a tightening in the market.” This will not apply to China, where producers are less eager to cut back, but this has little impact on the global market, as China does not export very much aluminum.

As of June, the total estimated global output of aluminum was 50.6 million metric tons, representing a 5.5 percent increase year-over-year.

Aluminum Outlook for 2014

United Co. Rusal (EPA:RUSAL), the largest producer of aluminum, expects output outside of China will fall behind demand in the years to come, culminating in a deficit of 2.4 million metric tons in 2017.

“We already see the aluminum market falling into deficit due to curtailments and strong consumption,” Deputy Chief Executive Officer Oleg Mukhamedshin for Rusal told Bloomberg. “Rising aluminum premiums are a good sign of this. We expect the market deficit, excluding China, will only grow until at least 2017 due to increasing demand and capacity cuts.”

The metal, still trading at its lowest prices since 2009, resides in large quantities in warehouses around the world. This has caused Rusal, Alcoa Inc. (NYSE:AA) and Rio Tinto (NYSE:RIO) all to reduce production. These major producers choosing to cut back, while demand is forecast to rise 6 percent annually, creates a situation in which a deficit is likely. Indeed, according to Rusal, there is already a deficit of 429,000 tons outside China.

“We already see about 1.7 million tons of ex-China capacity being closed and we expect another 1 million tons to be idled or delayed next year,” Mukhamedshin told Bloomberg. “It is clear that China won’t export the primary metal. As a result, any capacity imbalance in China only affects the Chinese physical market.”

Accordingly, it is the capacity outside of China to which Mukhamedshin refers, and that investors need to keep an eye on in the year ahead.

On the other hand, Seeking Alpha argues there is little to lift the price of aluminum, or to cause all producers to slow their production of the metal. The source says smelters are not deterred from selling aluminum at prices higher than those on the LME at the moment, due to premiums on physical delivery. Without the premium, the low prices of the metal would prompt smelters to close, reducing production and therefore the surplus of aluminum on the market. However, there is little incentive for smelters to close as it stands, and the premiums are likely to persist. As such, the future of aluminum as Seeking Alpha predicts it is more of what the market saw this year. A continued surplus and depressed prices would, of course, not be favorable to investors.