Stuck in a pattern of structural oversupply, Barclays Research forecasts the price of aluminum to stay around 2,000 dollars per ton. It has tested several alternative scenarios to try to understand how the light metal market will evolve.
Despite ever more abundant surplus, producers have not taken adequate measures to balance the aluminum market. The surplus reached 889,000 tonnes in 2011, 1.5 million tonnes (Mt) in 2012 and expected to peak at 1.8 Mt in 2013. In this context, the average price of aluminum has fallen year on year by 16% in 2012 to 2,017 dollars per tonne, its lowest level since 2009, when it collapsed under the impact of the financial crisis.
While the above fundamental narrative is a simple one, it belies a number of significant distortions that mean the metal is “generally viewed in far more uncertain terms by market participants in 2013″ than it would be otherwise.
So, Barclays has established its first of five scenarii as a baseline for 2013. Assuming a stable aluminum production in Europe and North America, and a 12% increase in Chinese production, stocks will go in one year from 7.9 to 9.3 weeks of consumption. The bank expects indeed a significant increase in demand, 6%, but it still will not absorb the excess supply. The average price per tonne of light metal in 2013 should therefore recede from the current level falling to 1,990 dollars.
However, given the complexity of forecasting aluminum prices, Barclays has run four other scenarii taking into account several parameters such as changes in inventory relative to consumption, spare capacity, China‘s aluminum balance, overall industrial production, leading, light metal and financial indicators, such as SP500, Dollar and Libor.
2nd scenario: production cuts everywhere except China
If non-Chinese aluminum companies decide to reduce their production, supply will be reduced by 1.8 million tonnes, which would balance the market. The average price would reach 2,030 dollars, with an increase toward the end of the year to 2,100 to dollars. This is an unlikely scenario.
3rd scenario: Chinese production is reduced and the market balances
If Chinese offer increases by 5% instead of 12%, the expected surplus would be significantly reduced with only 7.3 weeks of aluminum consumption stored by the end of the year. If this happens, a price of 2,200 dollars at the end of the year with an average price of 2,100 dollars are possible. This scenario is plausible as 30% of Chinese aluminum manufacturing companies depend on subsidies to be profitable.
In this scenario, the global aluminum demand would jump by 10% instead of 6%, with consumption in China up by 15% instead of the 9% of baseline. In this case, the average price of the metal would reach 2,320 dollars with a peak at 2,500 into the 4th quarter. Such a case would depend more global macroeconomic developments rather than light metal fundamentals.
5th scenario: lower production outside China and booming global demand
This scenario, the most bullish, is the most unlikely to happen. If demand increases sharply, prices will appreciate and producers should not then proceed to production cuts. But in this unlikely event, the average price would be 2,365 dollars, with an average price of 2,700 in the 4th quarter. Year-end metal prices could peak around 2,900 dollars.