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More aluminum smelter cutbacks needed to balance market

By Tina Petersen

March 23, 2009 - As 18% -- or 6.5 million mt/year -- of global aluminum production is being curtailed amid a 60% decline in London Metal Exchange aluminum prices, analysts and corporate officials still say more output cuts are needed, particularly in the Western World.

The LME cash aluminum price peaked at $3,220/mt ($1.46/lb) in July 2008, but has fallen to 1,339/mt (60.8 cents/lb) as of March 18.

"Plummeting prices are the result of a collapse in demand for primary aluminum, as well as bearish speculation," said Davenport Equity Research in a March report.

"Demand has been crushed by a major drop in end-market demand globally and greatly exacerbated by inventory destocking throughout the supply chain, a process still ongoing today."

Davenport noted that the pullback in aluminum prices in July and August wasn't large enough for most producers to cut production.

However, starting in September a rash of shutdowns were announced, as prices continued in free-fall. To date, aluminum output cuts have reached 6.5 million mt, but not all of the announced cuts have impacted the marketplace.

According to Davenport, about 1 million to 1.5 million mt has yet to work through the system.

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"When it finally does, the market, unfortunately, should remain in surplus," requiring another 2.5 million mt to 4 million mt of additional cuts above those already announced, said Davenport.

John Ottestad, chief financial officer of Norway's Norsk Hydro, said recently that another 2 million mt of output curtailments is needed.

"There is a need for additional closures," he said, adding that the Western markets are the most imbalanced and where corrective measures will have to be taken.

"Producers have to cut or they will run out of cash," said Davenport. "This is logical in our view given that about 75% of global production is operating with cash costs above current aluminum prices." (See chart: Reported aluminium inventories surging )

It added that lower production and the end of destocking will likely stop or reverse the increase in primary aluminum inventories. (See chart: Announced aluminium production cuts)

"When this happens, aluminum prices will likely increase to a higher level, perhaps in the range of $1,500-1,700/mt in the near term [by summer's end]," said Davenport.

In the wake of sustained flat-lined demand, LME high-grade aluminum stocks have roared 153% in the past six months to 3.4 million mt on March 18 from 1.3 million mt in September 2008.

Macquarie Research said in a recent report that with the demand downturn "looking deeper and more prolonged," the analyst has reviewed the supply/demand and price outlook for aluminum and now expects the market to be oversupplied by about 3 million mt this year. (See chart: Aluminium supply/demand balance )

"Ultimately what we need to see is some improvement in global aluminium demand. Unfortunately latest order figures from the main developed world consuming countries still show no sign of turning around," it said.

Macquarie predicted the LME cash aluminum price would average 65 cents in 2009, while Davenport was a tad more bullish, expecting the LME cash aluminum price to average 66 cents for 2009, based on the price remaining at 59 cents through June, then rising to end the year at 82 cents.

"The collapse in demand has left the aluminum market awash with metal," said Macquarie.

"Producers have made substantial production cuts, but those cuts have only scratched the surface of the surplus. In this environment, it is hard to see what is going to turn the aluminium market around in the near term. Short of the bankruptcy of one of the major producers, we still find it difficult to generate enough production cuts to prevent a huge surplus this year and a fairly large surplus in 2010 also."

Macquarie said that while it expected prices to pick up over the 2010-2013 period, the huge overhang of stocks which will have built up by then "means that we are less positive on the scale of that price pickup than previously."

According to Harbor Intelligence, the end of the slide in aluminum prices is "getting closer," with the downside limited to $1,150-1,200/mt [52-54.5 cents/lb], it said in a recent report.

"Although global aluminum demand bottomed in December and global aluminum inventories peaked last month in terms of weeks of consumption, prices haven't officially bottomed yet," it said.

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