Aluminum Struggles With Oversupply

The aluminum market remains awash with metal, even as the world’s top producer United Co Rusal cuts output to pare the hefty global surplus that’s helped push prices 10% down since the start of the year.

Five years of stalling demand and faltering consumption in industries including automotive and aerospace have left some aluminum smelters struggling with prices close to or below their cost of production.

Benchmark three-month aluminum is trading around $1,860 a metric ton on the London Metal Exchange, nearly 15% off its 2013 high of $2,184 a ton.

Rusal has taken steps to help bring the market back into balance, saying Tuesday its first-quarter production was down 4% from a year ago, following an announcement in March that it would lower output by 7% this year to around 3.8 million metric tons.

Still, in a market where output is expected to come in around 45 million tons this year, there’s a way to go.

While Rusal is trimming its production, some smelters in China, the world’s largest aluminum producing country, are doing the reverse.

A push by China to bolster aluminum production in western province Xinjiang is adding to excess domestic stocks, with Rusal noting Tuesday that fresh China output, mostly from this province, has more than offset cutbacks in the country by loss-making producers in the first quarter.

In addition, LME-approved warehouses globally are piled high with more than five million tons of aluminum, and Shanghai Futures Exchange stocks have increased since the start of the year as cash-strapped producers deliver to the so-called the market of last resort.  Market participants can deliver metal to exchange warehouses in times of excess supply and slack demand, or take metal from the sheds when demand is strong and the market is tight.

According to the latest data from the U.K.-based World Bureau of Metal Statistics, the global aluminum market was in surplus by 317,100 tons in the first two months of the year, with that total representing seven times the amount of production Rusal cut in the first three months of 2013.

Low prices and high domestic stock levels may slow the progress of more new smelter projects this year, Rusal says. But, China must exercise the same discipline.