Sharp fall in global demand; more pain in store
China accounts for ~90% of the global incremental aluminium consumption.
Throughout CY07, the Chinese consumption growth hovered in the range of 40-50%,
and is down sharply at sub-10% levels in CY08. The financial turmoil witnessed by the
world in September has now got the manufacturing sector reeling under the pressure
of tighter credit/liquidity, which has worsened the aluminium demand outlook. With
exports accounting for 54% of China’s GDP, we do not see the country escaping this
slowdown. We expect aluminium demand to fall further in CY09E.
Aluminium to remain in surplus, despite production cuts
Globally, aluminium producers have announced production cuts, estimated at 679 kt
(679,000 tonnes). Despite this, the metal was in surplus of 759 kt in H1CY08, and
LME inventories have continued to rise. We, therefore, do not buy the tight supply
argument regarding the metal. Further, China alone is expected to add 1.5 mtpa over
the next six months and over 0.6 mtpa is being ramped up elsewhere in the world.
Overall, we expect surplus to further increase for rest of CY08 and also in CY09E.
We consider the cost push argument irrelevant
Marginal cost of production has definitely increased due to rising power costs, and we
estimate it to be USD 2,400/tonne currently. However, with the market in a
comfortable surplus, we do not see merit in a cost push argument that is applicable
only in a tight demand-supply situation. In any case, we expect energy costs to come
down in CY09E, which makes this argument even weaker.
CY09 price estimated at USD 2,300/tonne, below current marginal cost
Based on weakening demand, comfortable surplus, and additional capacity in the
pipeline, we have revised our FY09 and FY10 aluminium price estimates downwards to
USD 2,609/tonne and USD 2,375/tonne from USD 2,700/tonne and USD 2,570/tonne
Table 1: Global de