LONDON (Reuters) - Global aluminum production growth ground to a standstill in the first half of this year.
The world’s smelters produced 31.76 million tonnes of metal in January-June, a 1 percent decline on the first half of 2017, according to the International Aluminum Institute (IAI).
Expressed in annualized terms, global output in June was almost two million tonnes lower than a year earlier.
Production outside of China has been creeping higher since January but the growth rate is being constrained by an unusually high level of disruption with multiple plants operating at reduced rates.
National run rates in China, the world’s largest single producer, have also been recovering from last year’s combination of “illegal” capacity closures and winter heating season restrictions but are still down on year-earlier levels.
This stuttering production profile fits in with expectations that this year will be one of global supply shortfall and a resulting drawdown in inventories.
Graphic on Global Production in H1 2018 vs H1 2017:
Production in North America, Latin America, Western Europe and Africa fell in the first half of 2018 due to smelter problems.
North American production should in theory be rising with Alcoa reactivating part of its Warrick smelter in Indiana and Century Aluminum committed to doing the same at its Hawesville smelter in Kentucky.
In both cases, however, it’s been a case of two steps forward, one step back.
Alcoa has restarted two lines at Warrick but the refiring of a third has been pushed back due to a power outage in May. Century, meanwhile, has lost one line at its Sebree plant, also in Kentucky, for similar reasons.
The biggest drain on North American supply remains the union lock-out at the Becancour (ABI) smelter in Canada.
Rio Tinto, which owns a minority stake in Becancour, reported that production fell to 74,000 tonnes in January-June from 218,000 tonnes in the year-earlier period.
Alcoa, which operates the plant, told analysts on its Q2 results conference call that the two sides are back at the negotiating table albeit “with no update as far as when those discussions will conclude”.
Latin America production is sliding due to the curtailment of half of the 450,000-tonne per year Albras smelter in Brazil.
Hydro has cut the plant’s run-rate to align it with lower output at its Alunorte alumina refinery as mandated by a Brazilian court on environmental grounds.
The company has lowered expectations of a fast resolution with the Brazilian authorities, indicating a return to full operations some time between October and the middle of next year.
Also on the supply hit list are South Africa’s Hillside plant, recovering from what operator South32 describes as “an electric arc incident in the December 2017 quarter” and Rio Tinto’s Dunkirk smelter in France due to a power outage in February.
It’s worth emphasizing that this is an unusually long list of supply disruption in the aluminum market.
Interestingly, the one region that might have been expected to register lower output, Eastern Europe, actually saw production rise by almost two percent.
Whatever the disruptive impact of U.S. sanctions against Oleg Deripaska and his Rusal empire, it has not yet affected actual operating rates across its Russian smelter network.
Graphic on Chinese aluminum production:
Chinese production of aluminum fell by three percent year-on-year in the first half of 2018, according to the IAI.
This is an estimate.
The country’s official count of what’s happening in its huge aluminum smelter sector has been widely rejected by market analysts and the IAI now folds the National Bureau of Statistics figures into an envelope of independent assessments.
It’s not ideal but is realistically as good as we’re going to get and has at least removed some of the monthly volatility in the official figures.
China’s national run-rate has picked up to 101,000 tonnes per day in June from 88,330 tonnes in November, the start of the forced winter curtailments in the regions around Beijing, but is still well short of the 107,700 tonnes registered in June 2017.
New capacity growth, on the other hand, is being slowed both by a requirement that what starts up must match what’s been closed and plans to force captive power plants to pay more to subsidize other electricity users.
Since much of the new planned capacity is based on exactly such captive power, mostly coal, the heightened uncertainty as to what Beijing’s directive means in specific provinces seems to have caused a collective pause for thought.
Meanwhile, the prospect of more forced curtailments is looming ever larger as the November start of the winter heating season comes around again.
Last year’s net impact underwhelmed relative to expectations but the war on winter smog will encompass more cities and provinces this year.
Throw in the continued crackdown on “illegal” capacity and the rolling environmental checks on the aluminum sector and the Chinese production picture is an evolving jig-saw puzzle with multiple moving parts.
Global production of aluminum may have ground to a halt but consumption hasn’t.
There is a broad consensus, articulated by both Alcoa and Hydro in their Q2 results, that global consumption growth is running around 4-5 percent.
The inescapable mathematical logic is that the aluminum market is now running in persistent supply deficit. Hydro pegs it at around 1.5 million tonnes this year and Alcoa between 1.1 and 1.5 million tonnes.
Global stocks are being drawn down to fill the gap.
Research house CRU thinks expects global stocks to fall by 13 percent over the January-September period this year, part of a longer-running trend that will see inventories return to pre-Financial Crisis levels by 2019.
Just don’t expect to see this tectonic turnaround reflected in visible exchange stock movements.
London Metal Exchange (LME) stocks, for example, have recently been rising but this is down to the recent market squeeze.
As is often the case with LME cash tightness, metal has been sucked into the system only to change hands and be moved out again, witness the high level of stock cancellations over the last few days.
The push and pull on LME stocks is serving only to mask increasingly bullish fundamental drivers.
One of which has been the unusual number of supply hits in a market that has historically been prone to over-production rather than under-production.
These multiple smelter outages, though, are accelerating a deeper-rooted drift into supply deficit.
(The opinions expressed here are those of the author, a columnist for Reuters)
Editing by David Evans