Market and product
Soft Aluminium prices likely in near term as output cuts may take time
A large number of Aluminium players are making losses at present, some of whom have announced production curtailments by the end of the current calendar year. Despite such measures any meaningful reduction in production would take time, which is likely to keep aluminium prices soft in the near to medium term, according to ICRA.
Global consumption of primary aluminium ingots during the period January to June 2015 (H1CY2015) increased to28.3 million metric tonnes (MMT) from26.3 MMT in H1CY2014, reflecting an annualized growth rate of7.6%.
However, in ICRA’s opinion, demand growth of final downstream aluminium products would have been lower than the above growth rate because of a slowdown in the major aluminium consuming sectors in China, which accounts for almost half of global aluminium demand. ICRA believes that this would have resulted in a build-up in the inventory of intermediate products of aluminium.
The excess availability of the metal in the market, along with weak sentiments has dragged aluminium prices down in the current calendar year (CY2015). Price of aluminium traded in the London Metal Exchange (LME) fell to its six year low of$ 1480/MT in August 2015. Additionally, a rapid fall in aluminium premiums by over 75% has resulted in spot aluminium prices declining to the prevailing levels of $1650/MT from2450 USD/MT in December 2014. ICRA notes that the current aluminium prices are lower than the cost of production of a majority of aluminium manufacturers globally.
This indicates that a large number of players are making losses at present, some of whom have announced production curtailments by the end of the current calendar year. Despite such measures, ICRA believes that any meaningful reduction in production would take time, which is likely to keep aluminium prices soft in the near to medium term.
In the domestic market, apparent aluminium consumption grew at a healthy20% during Q1FY2016 on an annualized basis, driven mainly by the power transmission sector. In addition, aluminium production also registered a strong growth following a ramp up of production at some of the greenfield smelters commissioned in the recent past.
Nevertheless, domestic aluminium players face challenges due to prevailing low prices, as well as increasing import of the metal from China and countries in the Middle East, both in the forms of scrap as well as ingot. While softening costs of some of the key inputs like coal will reduce production costs, margins of the domestic manufacturers would still remain under pressure in the near term.
