Aluminum’s Rally Can Last on Higher China Costs, Rusal Says

  • Rusal says rising coal price to limit China smelter restarts
  • Aluminum deficit will widen in 2017, Mukhamedshin predicts

Aluminum prices will keep rising as Chinese smelters get squeezed by increasing raw-material prices, making it tougher for them to expand production, according to United Co. Rusal, the world’s second-biggest producer of the metal.

Thermal coal prices have surged about 60 percent this year and energy accounts for around half of the cost for Chinese smelters to produce aluminum. Alumina prices are rising too, according to Oleg Mukhamedshin, Rusal’s deputy chief executive officer. That means idled plants are less likely to be restarted, even though aluminum prices have increased this year.

“Rising raw materials prices are pushing the cost curve of the Chinese producers up," Mukhamedshin said by phone from London. "The current trend for the prices to recover is sustainable."

The rally in aluminum has been driven by strong Chinese demand, fueled by a credit and construction boom and lower-than-expected production. The metal traded in Shanghai has surged 18 percent this year and is near the highest level since April. In London, prices are up 11 percent in 2016.

More Balanced

"The market has become more balanced," with China boosting output by 2 percent this year, Mukhamedshin said. As a result, there will be a global deficit as high as 700,000 metric tons this year, he said. That will widen to 1.2 million tons in 2017, and may reach 1.8 million tons in 2018, he predicted.

Rusal’s view is contrary to some analyst expectations. Citigroup Inc. and Deutsche Bank AG have highlighted the risks of rising production from low-cost smelters in China as aluminum prices gained. More smelting capacity is expected to come to the market by year-end and will hurt prices, Xiong Hui, chief analyst at state researcher Beijing Antaike, said this week.

China’s exports of aluminum in unwrought and product form have fallen slightly this year, giving some relief to world producers. Total shipments to end-September reached 3.47 million tons, down from 3.56 million tons a year ago, according to China’s customs data Thursday.

Analysts will review forecasts after meeting with clients during LME Week, Mukhamedshin said. The London Metal Exchange holds its annual forum during the week starting Oct. 31. The negative forecasts were due to expectations of more Chinese plants restarting operations, which isn’t happening because the industry is more consolidated and the government has tightened control, he said.

China aluminum demand rose 9 percent this year, compared with earlier expectations for 7 percent growth, according to Rusal’s data. The Russian producer said demand will increase 6 to 7 percent next year, while output growth will decline.

Given the market deficit, stockpiles are expected to fall further, Mukhamedshin said. That’s reflected in the premiums, which have started to rise, he said.

“The time of cheap commodities is slowly going away,” he said.

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