LONDON, Nov 6, 2018
LONDON, Nov 6, 2018 /PRNewswire/ --
LME aluminium inventories fell below 1Mt for the first time since 2008. CRU forecasts a 1.7 Mt world deficit in 2018 and the market will soon need additional supply.
With very few new smelters being built outside China and with supply-side reforms capping Chinese expansions, it is now time to start considering new investments in smelter capacity. But capital for new investments is limited, particularly as 40% of smelters are losing money due to high operating costs. Currently, high cost smelters are under threat of closure due to escalating raw material costs, and remaining idled capacity is mostly likely to remain closed. Eventually, with no near-term boost to supply and inventories set to dwindle the price must respond. This will be a key signal for a capex turning point from western companies, but they will be wary of how the Chinese will also respond to higher metal prices.
Where we are now: Falling stocks and low capex
Consistent growth in demand globally and limited new supply has resulted in an expected market deficit of 1,7 Mt in 2018. Consequently, inventories are decreasing to make up for the supply gap, and LME inventories have fallen below 1 Mt for the first time since 2008.
In a typical cycle, one should expect inventory drawdown and higher prices to be followed by investments in smelting capacity. However, since the major China-led expansions between 2012 and 2014, capex in new smelting capacity outside of China is now at its lowest level in close to 20 years. The average capex in the industry from 2008 to 2014 was $6.2bn per year, whilst the average since 2015 is $4.7bn per year, 25% lower in real terms.
In addition to that, total aluminium inventory levels are currently running close to 60 days of consumption, the lowest ratio since before the Global Financial Crisis (GFC). However, in the past low inventories prompted an increase in investment, now both are heading lower.
After the GFC, low capex in the industry matched a period of peak levels of inventory, as shown in the highlighted area 1 in the chart below. However, the area highlighted as 2 shows an inversion of this, with low capex matching low inventory levels. It indicates a positive sign for prices, in order to call for more smelter investment.
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