China ramp up to rein in aluminium price bulls

LONDON: Aluminium's extensive price rally of recent months is likely to stall this year as China ramps up production and creates a surplus that will offset predicted shortages in the United States, Europe and Japan.

Benchmark aluminium on the London Metal Exchange at around $2,000 a tonne is up 35% since April last year, when the metal used in the transport, packaging and construction industries fell to its lowest since January 2016.

Losses reversed as economic activity resumed, particularly in top consumer and producer China, after the coronavirus lockdowns in the early part of last year.

"We anticipate a roughly balanced market this year, but aluminium prices will be supported, even though the upside should ultimately be capped," said BoA Securities analyst Michael Widmer.

Widmer expects global aluminium consumption at 68.26 million tonnes this year and production at 68.29 million tonnes.

"You could potentially see a huge supply increase from China. Falling imports to China or rising exports from the Asian country could help alleviate tightness in the Western world," Widmer said.

Expectations are that both Western Europe and the United States, which has tariffs on aluminium imports, will see deficits of about 4 million tonnes each this year.

Other major consumers such as Japan are expected to see deficits, though not to the same extent.

These shortages will need physical market premiums - paid on top of the benchmark LME aluminium price -- to stay high enough to attract metal from the Middle East, Russia and China, which are all forecast to see surpluses this year.

China's aluminium production in 2020 rose 4.9% from the prior year to a record 37.08 million tonnes as smelters cashed in on soaring prices, with December output hitting a monthly all-time high.

Higher China aluminium production is one reason behind JPMorgan's forecast of a 2.4 million tonne surplus this year. Its analysts see prices averaging $1,740 a tonne in the fourth quarter of this year and $1,680 in the first quarter of 2022.

"Aluminium prices will likely face a fundamental reckoning as we progress through 2021," the bank said in a note.