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Soft demand for aluminum and cost deflation has seen LME futures prices in narrow range with low volatility. China is the world’s top aluminium producer and continues to defy low prices as falling alumina costs boost margins.

China Aluminum worker

A worker at a production line of Nannan Aluminum Co Ltd in Nanning, China via China Daily

2018 annual output was a record. In December China churned out more than 3 million tonnes in a month for the first time, undeterred by aluminium prices at two-year lows, the impact of the US-China trade war and Beijing’s environmental crackdown. Chinese capacity additions are expected to cap aluminum’ supside for the near futures while support comes in with a tightening China refined balance and further China easing.

Production has been spurred on by new smelter openings late last year and higher utilisation rates following a plunge in the cost of raw material alumina.

Aluminium China capacity 2019

On the demand side Chinese demand has been weaker than expected so far in 2019 due to weakness in automobile output, property completions and power grid spending. During the first five months domestic semis demand dropped 2% y/y. Citigroup anticipate Chinese demand will recover during 2H’19 on the back of UHV buildout and housing completion related demand.

Despite weak domestic demand,  Chinese visible inventories drew 500kt in 1H’19 on robust semi product exports, and are expected to draw another 500kt by year end driven primarily by improving domestic demand. Recent demand remained weak and inventories built.Aluminium product exports have been extremely resilient as ex-China fabricating capacity might have been hit badly by rising Chinese exports over the past few years.

Some export volumes have also been locked in by term contracts, which should unwind through the 2H’19 given the export arbitrage is moving into negative territory. China’s smelting capacity build out is expected to accelerate during 2H’19 after remaining muted over the summer due to weak profitability. This is likely to put pressure on market balances during the first half of 2020. China was the pocket of refined tightness this year thanks largely to strong semi’s exports.

Aluminium Production Growth 2019

Citigroup gave a Base case (60%), Bear case (30% and Bull case (10%) for prices for the year ahead

Base Case (60%):

We revise down 2H’19 aluminium price forecasts and now expect prices to average $1845/t in 2019. We continue to project an upward price trend into 2020 as improved ex-China supply/demand balances will likely trigger continued inventory draws and a less steep contango on the forward curve, which in turn should prompt speculative shorts -particularly CTAs -to reduce their positions. Further China easing and an eventual US-China trade deal around year end may also support pricing over the next 6-12 months.

Bull case (10%):

Our bull case assumes that global aluminium demandgrowth will accelerate in to 2020 as global industrial production growth gets back on track. The pace that aluminium substitutes steel and copper at key end-use sectors would also rise to keep the aluminium market in deficit and global inventories to continue drawing. Under this scenario,aluminium prices will need to reach $2,300-2,400/t as soon as 2020 in order to incentivize new greenfield capacity additions.

Bear case (30%):

Our bear case assumes major aluminium cost deflation and weak demand pulls prices down to $1,650/t in the near term before the market re-balances itself. This scenario also entails the assumption that global growth slows down materially into 2020 –on an escalating trade war and a lack of China easing –and aluminium demand encounters persistent challenges. In the meantime, supply growth from China remains resilient.

Output hit 3.05 million tonnes in December last year, National Bureau of Statistics data showed, up 8.2 percent from November and up 11.3 percent from December 2017. Full-year output came in at 35.8 million tonnes in 2018, up 7.4 percent from the previous annual record in 2017. China added 3.8 million tonnes of aluminium smelting capacity in 2018, while about 2.8 million tonnes was shut due to a slump in aluminium prices. Winter restrictions on output to curb pollution were also less severe than expected.

Shanghai aluminium prices slumped a hefty 14 percent over 2018 to below 14,000 yuan (USD 2,063) a tonne amid plentiful supply and worries over the impact of the Sino-US trade war on demand.

Source: Citgroup, LME

From The Traders Community Research Desk

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