Production cuts announced by aluminum producers wont be
enough to offset tepid aluminum demand this year, although
regional premiums should continue to climb, according to
Davenport & Co. LLC analysts.
"Producers are coming
to terms with low aluminum pricesfinally. However, the
majority of these cuts have yet to be implemented," analysts
Lloyd T. OCarroll and John F. Ockerman said in a June 27
note to investors.
Aluminum prices will
fall this year but should improve in 2014 thanks in part to
slowing demand growth being offset by global production cuts,
the analysts said, and aluminum demand should grow
significantly over the next 10 years largely due to increased
auto industry demand for aluminum body sheet.
London Metal Exchange
cash prices for aluminum will drop 4.6 percent this year to an
annual average of $1,926 per tonne before rebounding to $2,225
in next year and $2,375 in 2015, OCarroll and Ockerman
producers could see anticipated profits narrow or even swing to
losses as a result of lower aluminum prices, the analysts said.
Despite current low aluminum prices, regional premiums "should
continue their uninterrupted march higher" over the next 12 to
18 months because of wide contangos on the LME, which should
attract more metal into financing deals. U.S. Midwest premiums
could reach 15 cents per pound in late 2014, they
Midwest premium is currently 11.75 to 12.25 cents per
But the analysts
warned that higher premiums may not be an unmitigated blessing
for producers, especially over the long haul. "Higher premiums
are cushioning the blow of low prices for aluminum producers,"
they said. "While this is beneficial in the short term for
earnings, it has kept more production online than would have
otherwise occurred, leading to a more-prolonged price
But the current drop
in LME prices might "accelerate" the announcement of production
cuts in 2013, OCarroll and Ockerman said. While tighter
supplies and improving demand should bolster prices in the
longer term, "stock financing should act as a soft ceiling on
prices and prevent swift, sustained price improvements."
Alcoa Inc. has
announced plans to permanently close two older potlines at its
Baie-Comeau smelter in Quebec and postpone by three years the
construction of a new potline as the company looks to cut costs
amm.com, May 16). The Pittsburgh-based aluminum
company has said it is considering cutting up to 460,000 tonnes
of smelter capacity by August 2014 as aluminum prices remain
amm.com, May 1).
The European recession
and slow growth in China have weakened demand at the same time
that the market is exhibiting "negative sentiment" toward
commodities in general and aluminum in particular,
OCarroll and Ockerman said. "We expect this will continue
to be the status quo."