Sep 132009

Aluminium Long-Term Outlook Q2 Update. According to Brooke Hunt, industrial production growth is set to average 3.1% p.a. over the period 2009 to 2020, up slightly from 2.7% p.a. for the period 2000 to 2008. China is expected to lead growth with IP anticipated to increase 10.1% in 2009 – 2020.

The economic recession which followed the failure of some western financial institutions and banks ten months ago was initially expected to have only a small effect on Chinese growth. However, the resultant collapse in worldwide demand and subsequent collapse in requirement for Chinese exported products has had a significant effect on the economy of China. The most recent trade data suggests that the fall in demand for Chinese goods may be bottoming out but the trends indicated by these figures do not carry across to the Chinese aluminium market. We expect aluminium demand to fall by 1% in 2009 to 12.7Mt. This contrasts with compound average annual growth of 17.9% p.a. seen over the first eight years of this decade.

As a large section of the global economy slid into recession in late 2008 and into 2009 global aluminium demand has been destroyed, particularly in mature economies and has led to a forecast surplus in 2009 of 2.5Mt. Although we are forecasting a 6% drop in smelter production in 2009, a greater decline of 8.3% is forecast for demand. Stocks are therefore expected to continue to rise in 2009 reaching 102 days of consumption. For the market to be balanced with the current consumption forecast production would need to fall by 12% in 2009. Brook Hunt is forecasting that LME cash prices will decrease from the 2008 average of $2571/t, to $1445/t in 2009. We have allowed for 70kt, 4.9Mt and 8.3Mt of curtailments in 2009, 2010 and 2011 respectively as prices cut into the cost curve. The significant volume of curtailed capacity will act as a cap on prices over the period 2012-2020.

Our analysis of long-run aluminium incentive prices that will provide sufficient incentive (15% IRR) to justify the expansion of capacity to meet incremental demand growth indicates that a price of ~$1928/t ($2009) is required.

Our base case supply forecast is seen as more than adequate to meet projected demand of 57Mt in 2020, equivalent to 3.5% per annum growth. The base case supply forecast can meet projected demand growth of 4.2% per annum, while the combination of Base case and projects in our highly probable category can meet demand growth of 5% per annum through 2020.

SGA production is estimated at 72.4Mt in 2009, down 10.4% y-o-y and is forecast to grow at 4% per annum to 88Mt in 2014 when capacity utilization is projected at 92%. Consequently, we forecast modest spot price appreciation through 2014 from current levels of $210/t to average $270/t or 14.5% of the LME aluminium cash price. Furthermore, there is little or no risk of being capacity constrained through 2020.

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