abare.gov.au - Australian commodities – March quarter . volume 16 . number 1 2009

Aluminium

Outlook to 2014

Rebecca McCallum

Aluminium prices are forecast to average around US$1400 a tonne in 2009, more than 40 per cent lower than the 2008 average of US$2487 a tonne. In January 2009, aluminium prices declined to less than US$1400 a tonne, the lowest since April 2003. Rapidly falling demand and relatively slow cuts to worldwide production have resulted in aluminium stocks rising rapidly.

Prices to rise over the medium term

Production cuts made in the past six months are not expected to be sufficient to prevent further increases in stocks, as consumption falls rapidly in line with weak world economic growth and declining demand for aluminium intensive products such as building materials and motor vehicle bodies. As a result, prices are expected to remain weak during 2009.

World aluminium stocks are expected to reach 8.2 weeks of world consumption in 2009, and 8.5 weeks in 2010. As world economic growth picks up during 2010, aluminium prices are expected to increase, rising by around 19 per cent to US$1660 a tonne.

Over the medium term, aluminium stocks are expected to decline to around 7 weeks of world consumption. While stocks are not expected to fall rapidly, increases in consumption, as economic growth returns to more sustainable levels, are projected to result in stocks declining.

In response to stronger global demand and falling world stocks, aluminium prices are projected to increase in 2011 and 2012, to average around US$2000 a tonne (in real terms) in 2012. After this time, as new projects are completed and idled capacity resumes production, prices are projected to moderate to around US$1800 a tonne by 2014.

World consumption to fall by 2 per cent in 2009…

World aluminium consumption is expected to decline for the second consecutive year in 2009. Despite an expected gradual recovery in the second half of the year, consumption for 2009 as a whole is forecast to fall by around 2 per cent to 36 million tonnes. Sharply lower world economic growth is expected to lead to declining demand for aluminium intensive goods.

Weaker housing and automobile construction in North America and Western Europe is expected to lower demand for aluminium in these regions. On average, a new vehicle contains around 130 kilograms of aluminium, up from around 50 kilograms 20 years ago. Increasing fuel costs and fuel efficiency standards have resulted in significant substitution of aluminium for steel in vehicles to reduce weight and therefore fuel consumption. As sales of new cars have fallen rapidly and are not expected to recover substantially during 2009, demand for aluminium for vehicle production is forecast to decline.

Aluminium is widely used in housing construction in window frames, doors, garages and roofing sheets because it is lightweight, does not rust, and is flexible in hot conditions. With house construction expected to remain weak in 2009, particularly in developed economies, aluminium consumption in these applications is expected to fall.

…but consumption in China firm

Continued development of infrastructure in China as part of the Chinese Government’s economic stimulus package is forecast to support aluminium consumption in China. Consumption growth is expected to be weaker at around 3 per cent in 2009. Nevertheless, at around 13 million tonnes, China’s consumption is expected to account for more than 35 per cent of world consumption.

Consumption increasing over the medium term

World aluminium consumption is expected to grow rapidly once economic growth recovers during 2010. Automotive manufacturing and non-residential construction activity are expected to recover first, with economic stimulus packages from governments around the world aimed at encouraging business investment and developing domestic infrastructure. Both of these activities use significant volumes of aluminium. Aluminium consumption is forecast to increase by 6 per cent in 2010, to 38.1 million tonnes.

Aluminium consumption is expected to continue to grow in line with increased construction and development, particularly in emerging economies. World consumption is projected to grow at an average rate of 5 per cent from 2011 to 2014, reaching 46.2 million tonnes in 2014.

Significant cuts in world production

Production of aluminium is forecast to decline by 4 per cent in 2009, to 37.5 million tonnes. Production cuts in the United States, Canada, China and the European Union are expected to amount to more than 1 million tonnes.

Aluminium production increased by around 3 per cent in 2008, mainly as a result of increased production in the first half of the year. As a result of increasing stocks and weakening demand, aluminium prices declined rapidly from mid-July. While costs of inputs such as alumina have also fallen, a number of producers including Alcoa, Rio Tinto Alcan and Chalco, have reduced production or closed smelters.

Production increasing over the medium term

From 2010, world aluminium production is projected to increase in response to stronger world demand and, hence, rising prices. New smelters planned in the Middle East, Latin America and Europe are currently being deferred or are on hold as a result of falling aluminium prices. These projects are expected to resume development as aluminium demand and prices recover from 2010.

New aluminium smelters take around two years to reach capacity, however, the incremental increase in production from a number of new smelters, combined with existing smelters resuming full production, is expected to result in world production increasing by almost 3 per cent in 2010. World primary aluminium production growth is projected to average around 4 per cent a year from 2010 to 2014, reaching 46.1 million tonnes in 2014.

Australian production and exports relatively stable

Australian aluminium production is forecast to remain relatively stable at around 1.96 million tonnes over the outlook period. No new aluminium smelters are planned to commence during the outlook period and work on existing smelters is expected to mainly replace existing capacity rather than provide additional capacity.

In line with production, Australia’s aluminium exports are also expected to remain relatively steady, at around 1.67 million tonnes a year. Reflecting forecast movements in world prices and the Australian exchange rate, export earnings are forecast to be $4.7 billion in 2008-09, moderating to around $3.9 billion (in 2008-09 dollars) in 2013-14.

Alumina

Most alumina sales are accounted for as internal transactions in vertically integrated companies or are made on a contract basis where the alumina price is linked to the aluminium spot price. Any remaining alumina produced is sold on the spot market, with purchases made predominantly by small Chinese smelters. As a result, alumina spot prices reflect the supply–demand balance of the spot market and not necessarily the balance of the alumina market overall or the spot aluminium price.

World prices lower

In 2008, the spot alumina price averaged around US$380 a tonne, but has since fallen to less than US$200 a tonne. Falling demand for aluminium and hence its production, has reduced consumption of alumina and increased its availability. This situation is forecast to continue in 2009 as cuts in alumina production lag cuts to aluminium production where companies are not vertically integrated.

Alumina prices are expected to begin recovering in 2010 as demand for aluminium increases and aluminium production increases. Increased demand for alumina ahead of a recovery in production is projected to result in prices rising to 2012. After this time, prices are expected to remain relatively stable.

Alumina consumption and production linked to aluminium production

Forecast lower aluminium production in 2009 is expected to reduce consumption of alumina. As a result, vertically integrated aluminium producers are expected to reduce alumina production to align with lower aluminium production. In addition, a forecast decline in the spot market price for alumina is also expected to lead to alumina companies reducing production.

Over the medium term, increased demand for aluminium, and therefore also for alumina, is expected to result in existing alumina refineries resuming full production. Alumina prices are forecast to rise, albeit at a slower rate than aluminium prices. A number of new refineries and capacity expansions are also expected to be completed over the medium term. Many of the new refineries are located in China, while developments are also taking place in Brazil, India and Eastern Europe.

Australian production increasing over the medium term

Australia’s production of alumina is projected to increase steadily to 2010-11, supported by recent production expansions. From 2011-12, a number of new projects, including Chalco’s planned refinery in Queensland and expansions at Rio Tinto’s Yarwun and BHP’s Worsley refineries, are expected to result in Australia’s alumina production reaching almost 27 million tonnes by 2013-14.

In line with increased production from capacity additions, Australia’s alumina exports are expected to rise over the short to medium term. With no increase in domestic aluminium production expected over the outlook period, all increases in alumina production are anticipated to be directed to exports. Accordingly, alumina exports are projected to rise from around 16.2 million tonnes in 2008-09 to 23 million tonnes in 2013-14.

Despite rising export volumes, export values are expected to fall to around $4.3 billion in 2009-10 as a result of forecast lower prices. Beyond 2010-11, export values are expected to increase, reflecting the combined effect of increased export volumes and higher alumina prices. By 2013-14, the value of Australia’s alumina exports (in 2008-09 dollars) is projected to be around $6.4 billion.

Aluminium and alumina outlook

unit

2007

2008

2009

2010

2011

2012

2013

2014

World

Production

Primary aluminium

38 110

39 102

37 544

38 606

40 259

42 635

44 493

46 104

Consumption

Primary aluminium

37 398

36 912

36 033

38 065

40 336

42 535

44 431

46 176

Closingstocks

Primary aluminium a

2 960

4 139

5 650

6 191

6 113

6 214

6 276

6 204

– weeks consumption

wks

4.1

5.8

8.2

8.5

7.9

7.6

7.3

7.0

Prices

World aluminium b

– nominal

US$/t

2 639

2 487

1 385

1 655

1 938

2 175

1 950

2 013

USc/lb

120

113

– real c

US$/t

2 755

2 493

1 385

1 627

1 867

2 050

1 799

1 816

USc/lb

125

113

Alumina

– nominal spot

US$/t

341

381

179

199

233

261

254

262

– real spot c

US$/t

356

381

179

195

224

246

234

236

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

Australia

Production

Primary aluminium

1 954

1 964

1 963

1 953

1 959

1 960

1 959

1 958

Alumina

18 506

19 359

19 628

20 280

21 695

25 715

26 780

Bauxite

Consumption

Primary aluminium

285

288

266

293

294

Exports

Primary aluminium

1 638

1 650

1 713

1 661

1 666

1 667

1 666

Nominal value

A$m

5 650

4 967

4 718

3 556

4 221

4 582

4 586

4 356

Real value d

A$m

5 959

5 067

4 718

3 488

4 040

4 279

4 178

3 871

Alumina

15 056

15 739

16 217

16 469

17 872

21 890

22 957

22 958

Nominal value

A$m

6 243

5 809

5 764

4 346

5 507

7 277

7 598

7 221

Real value d

A$m

6 584

5 926

5 764

4 263

5 271

6 795

6 922

6 417

Bauxite

5 700

7 917

8 696

6 623

5 225

8 902

10 576

12 335

Nominal value

A$m

153

206

231

175

137

234

278

325

Real value d

A$m

162

211

231

172

131

219

253

288

Total value

– nominal

A$m

12 046

10 983

10 713

8 077

9 866

12 094

12 462

11 901

– real d

A$m

12 706

11 204

10 713

7 923

9 442

11 293

11 353

10 577

a Producer and LME stocks. b LME cash prices for primary aluminium. c In 2009 US dollars. d In 2008-09 Australian dollars. f ABAREforecast. z ABARE projection.
Sources: London Metal Exchange; World Bureau of Metal Statistics; ABARE.