Aluminium market update Industry Update -...
Transcript of Aluminium market update Industry Update -...
Deutsche Bank Research
Global
Metals & Mining
Industry
Aluminium market update
Date
15 June 2016
Industry Update
Start 'em up!
Downside risks aplenty
________________________________________________________________________________________________________________
Deutsche Bank AG/London
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.
Grant Sporre
Research Analyst
(+44) 20 754-58170
Sharon Ding
Research Analyst
(-) - -
Top picks
Alcoa (AA.N),USD9.10 Buy
Hindalco (HALC.BO),INR115.75 Buy
Rio Tinto (RIO.L),GBP1,895.50 Buy
China Hongqiao Group Ltd. (1378.HK),HKD5.06
Buy
Source: Deutsche Bank
Companies Featured
Norsk Hydro (NHY.OL),NOK31.15 Hold
Alcoa (AA.N),USD9.10 Buy
Alumina (AWC.AX),AUD1.36 Hold
Chalco (2600.HK),HKD2.36 Hold
Hindalco (HALC.BO),INR115.75 Buy
United Company RUSAL (0486.HK),HKD2.30
Hold
China Hongqiao Group Ltd. (1378.HK),HKD5.06
Buy
Rio Tinto (RIO.L),GBP1,895.50 Buy
Source: Deutsche Bank
China is likely to remain a net exporter of aluminium to the rest of the world. In part this is justified by the technological and efficiency gains the country has made over the past ten years. However, power is now abundant after years of capacity expansion to the extent that energy is now being exported in the form of aluminium. This is not permanent but whilst local governments continue to provide subsidized power, Chinese latent capacity will continue to keep a lid on prices. In our assessment this will keep the market modestly oversupplied in the medium term. A weakening RMB simply makes the Chinese industry even more competitive, and is a key downside risk to LME prices.
Ahead of the pack on demand growth The demand outlook remains decent for aluminium. Yes, demand growth is likely to slow from current levels, as China transitions away from the FAI heavy growth model. Demand growth from 2000 to 2015 was 5.3% CAGR, with growth likely to slow to 3.2% CAGR over the next 10 years. Although growth is slower, this is better than the 2.8% CAGR from 1985 to 2000, and certainly beats demand growth in the other metals. The regions contributing to strong demand are India, China and the US. In China, UHV and rural electrification projects, combined with strong Auto output is the main driver over a two year period. However, a temporary resurgence in the building and construction sector should push 2016 demand growth above that of 2015. In the US, it is the increasing aluminium penetration in Autos and a revival in the housing market which is positive, and in India spending on the grid is the main driver.
Supply side reform in China is going to take time As we have learnt from both the Chinese steel and aluminium industry, when there are profits to be made, reform is quickly pushed aside. After the domestic price recovery, most of the Chinese aluminium industry is now profitable. We estimate that at least quarter of the capacity that was shut during late 2015 (1 – 1.2Mtpa) is likely to be restarted by the end of 2016. That’s not including new, low cost and efficient capacity which will continue being added over the course of 2016 (another 3 – 3.2Mtpa). We forecast the flexible latent capacity in China to keep the market in a surplus, capping the upside on the Chinese domestic price, and ultimately the LME price through increasing semi’s exports.
A deflationary bias and a weakening RMB point to downside risks The willingness of local governments to subsidize power for domestic smelters, combined with a trough in coal and alumina pricing means that the aluminium market remains in the throes of deflation. We expect these deflation pressures to ease, but given the continual efficiency gains there is always going to be a deflationary bias to the metal. The tipping point for restarts seems to be around RMB11,500/t which equates to an LME price of c.1,575/t at the current RMB exchange rate. However an RMB closer to 7, could drag the equivalent price down below USD1,500/t.
15 June 2016
Metals & Mining
Aluminium market update
Page 2 Deutsche Bank AG/London
Overcapacity is tough to shift
“Supply side” reforms will likely take time.
Chinese “supply side” reforms have not been successful in the aluminium
sector so far. We estimate that at least quarter of the capacity that was shut
during late 2015 is likely to be restarted by the end of 2016. That’s not
including new, low cost and efficient capacity which will continue being added
over the course of 2016. Although we expect Chinese smelting capacity
additions to slow over the course of the next few years, partly driven by new
“supply side” reform initiatives and partly by simple economics. In our view,
the path to a balanced market in aluminium will be slow and remain a
headwind for the metal. We continue to forecast a rebalancing of the global
aluminium market, which means declining Chinese surpluses and declining
ROW deficits. As has happened in a number of other regions, stranded power
never stays stranded indefinitely, and given that most of the aluminium in
China is produced using thermal coal fired power stations, we expect a more
“carbon emission” costs to creep into the aluminium cost base. Furthermore,
there is likely to be some push back from the rest of the world at being
crowded out by China.
Figure 1: Global aluminum market – normalizing by the end of the decade
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
China balance ROW balance Global balance
Tonnes (
mill
ion)
Declining Chinese surpluses
Declining ROW deficits
Source: Deutsche Bank, Wood Mackenzie
In the near to medium term, the willingness to restart shuttered capacity as the
domestic Chinese price recovered above RMB11,500/t, combined with the
willingness of local governments to offer power discounts to marginal
producers means that both domestic prices and LME prices will be capped to
the upside. Although the two major cost inputs, alumina and coal prices have
recovered from the lows, we do not expect these to become major inflationary
driving forces. More likely, continuous efficiency improvements will see a
deflationary bias in the sector. The caveat here of course is if the Chinese
government starts to apply greenhouse emission taxes onto coal fired power
15 June 2016
Metals & Mining
Aluminium market update
Deutsche Bank AG/London Page 3
generation. Overshadowing the debate on whether aluminium will start to
experience inflation on a consistent basis, is the likely weakening of the
Chinese currency, which will make Chinese exports far more competitive. By
way of example, if we assume a marginal cost in China of RMB11,500/t, and
an average 10% LME to SHFE discount, there is some downside risk to the
implied LME equivalent price should the RMB continue to weaken.
Figure 2: Downside risks should the RMB weaken
Implied USD price at various RMB exchange rates
Marginal cost range (RMB/t)
10% discount (RMB/t)
6.5 6.7 6.9 7.1 7.3
11000 9900 1,523 1,478 1,435 1,394 1,356
11500 10350 1,592 1,545 1,500 1,458 1,418
12000 10800 1,662 1,612 1,565 1,521 1,479
Source: Deutsche Bank
Demand is not the problem
A bump in 2016 demand before a modest slowdown
The demand outlook remains decent for aluminium. Yes, demand growth is
likely to slow from current levels, as China transitions away from the FAI heavy
growth model. However, the credit boost in H1 and the push on infrastructure
should see 2016E demand improve by 80bps over 2015E. The CAGR for 2000
to 2015 was 5.3%, with the CAGR from 2015 to 2025E likely to be closer to
3.2%. Still this is better than the 2.8% CAGR from 1985 to 2000.
Figure 3: Global aluminium growth to slow, but still remain robust
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
China demand growth % Global demand growth %
Source: Deutsche Bank, Wood Mackenzie
The 80bps improvement in Chinese demand growth is likely to be driven by
improvements in the Building and Construction, Electrical (Grid) and Transport
sectors.
We forecast a demand
growth CAGR of 3.2%for the
next ten years
15 June 2016
Metals & Mining
Aluminium market update
Page 4 Deutsche Bank AG/London
Figure 4: Chinese aluminium demand by sector (2016E) Figure 5: Chinese demand growth by sector
Building & Construction
27%
Transport21%
Electrical12%
Packaging9%
Consumer Goods17%
Machinery & Equipment
9%
Other5%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Building & Construction
Transport Electrical Packaging Consumer Goods
Machinery & Equipment
Other
2015 2016E 2017E 2017E
Source: Deutsche Bank
Source: Deutsche Bank, Wood Mackenzie, SMM
The improvement in New Starts seen in Q1 is likely to drive an improvement in
demand in the Building and Construction sector, although this is likely to be a
2016 phenomenon with the Chinese credit impulse likely to stall in the second
of half of 2016. Chinese vehicle output is up 11% year to date, and although
we expect the momentum to slow especially due to the tougher comps in Q4,
increasing aluminium penetration is likely to drive high single digit growth in
the this sector. Subway and high speed rail investments will also contribute to
aluminium demand in the rolling stock build out.
Figure 6: China New property starts (GFA) versus the
aluminium price momentum
Figure 7: China Passenger vehicle output (monthly)
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
Jan
-08
May-0
8
Sep
-08
Jan
-09
May-0
9
Sep
-09
Jan
-10
May-1
0
Sep
-10
Jan
-11
May-1
1
Sep
-11
Jan
-12
May-1
2
Sep
-12
Jan
-13
May-1
3
Sep
-13
Jan
-14
May-1
4
Sep
-14
Jan
-15
May-1
5
Sep
-15
Jan
-16
New Starts 3MMA YoY% China aluminium price 3MMA YoY%
200,000
700,000
1,200,000
1,700,000
2,200,000
2,700,000
Jan
Feb
Mar
Ap
r
May
Jun
Jul
Au
g
Sep
Oct
Nov
Dec
2006 2007 2008 2009
2010 2011 2012 2013
2014 2015 2016
(Units)
Source: Deutsche Bank, CEIC, Bloomberg Finance LP
Source: Deutsche Bank, CAAM
Lighter and cheaper aluminium conductors are widely used as aerial lines in
UHV projects and rural distribution systems. As shown in Figure 8 below, UHV
investments will account for c.20% in total grid spending in coming years
versus less than 10% in the past. Meanwhile, rural distribution spending has
also become a larger portion of total distribution spending starting in 2015.
15 June 2016
Metals & Mining
Aluminium market update
Deutsche Bank AG/London Page 5
Figure 8: UHV investment % of total grid spending Figure 9: Rural distribution investment of total
distribution spending
0%
5%
10%
15%
20%
25%
2009 2010 2011 2012 2013 2014 2015 2016e 2017e
UHV project becomes a larger component in total grid spending.
0%
10%
20%
30%
40%
50%
60%
70%
80%
2009 2010 2011 2012 2013 2014 2015 2016e 2017e
Rural distribution investment accounts a larger portion of total distribution spending.
Source: Deutsche Bank, SGCC
Source: Deutsche Bank, CEC
US aluminium demand also remains robust in the medium term, driven by
building and construction and the transport sectors. The transport sector is
becoming a larger component of the overall aluminium demand breakdown, as
aluminium penetration in vehicles increases. Although the US Auto cycle is
maturing, sales so far this year remain robust with a May SAAR of 17.4 million
units, above our US Auto team’s expectations of 17.1 million units. The sales
mix still favours trucks which are more aluminium intensive due to attractive
credit terms and cheaper fuel. We do however expect tougher comps into the
second half of the year.
Figure 10: US monthly SAAR Figure 11: US Auto sales mix: Comps (vs. the strong
increase in truck mix) could become somewhat more
difficult starting in late Q3 or Q4
8
10
12
14
16
18
20
Jan-1
3
Mar-
13
May-
13
Jul-13
Sep-1
3
Nov-
13
Jan-1
4
Mar-
14
May-
14
Jul-14
Sep-1
4
Nov-
14
Jan-1
5
Mar-
15
May-
15
Jul-15
Sep-1
5
Nov-
15
Jan-1
6
Mar-
16
May-
16
Retail SAAR Fleet SAAR
million units
27,500
28,000
28,500
29,000
29,500
30,000
30,500
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
Car Share Truck Share Industry RPU [RHS]
Source: Deutsche Bank, Wards, JD Power
Source: Deutsche Bank, Wards, JD Power
Assuming relatively flat US Auto sales, with a similar 55 - 60% sales mix in
trucks, we continue to forecast rising aluminium demand in the Transport
segment, with transport sector comprising c.40% of North American
aluminium demand. In addition to automotive sheet, which has been the
centre of attention for the past year, aluminium castings have also been a large
beneficiary of growing car output in the US. The castings segment in the US
and Canada consumed 2.7Mt of aluminium in 2015, an increase of 6.9% over
2015. Implicit in our forecasts are 2016 demand levels returning back to 2007
levels.
15 June 2016
Metals & Mining
Aluminium market update
Page 6 Deutsche Bank AG/London
Figure 12: Aluminium demand in North America’s
transport sector
Figure 13: North American shipments of castings by
industry
-
1,000
2,000
3,000
4,000
5,000
6,000
25%
27%
29%
31%
33%
35%
37%
39%
Aluminium demand in Transport (kt) Transport as percentage of total demand
0
500
1,000
1,500
2,000
2,500
3,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Aluminium Wheels Passenger Car & Light Truck Truck & Bus
All Other Trans Consumer Durables Machinery & Equipment
All Other Industries
kt
Source: Deutsche Bank, Wood Mackenzie
Source: Wood Mackenzie
The “surprise” element of North American aluminium demand has been the
Building and Construction sector. US housing starts have remained robust,
over the past few months, but we note that the momentum in new housing
permits have stalled in April, which could be an early warning sign.
Nevertheless, we forecast a modestly improving demand growth from the
Building and Construction sector.
Figure 14: US Housing market indictors Figure 15: Aluminium demand in North America’s
Construction sector
-20%
-10%
0%
10%
20%
30%
40%
50%
Ma
r 1
0
Jun 1
0
Sep 1
0
Dec 1
0
Ma
r 1
1
Jun 1
1
Sep 1
1
Dec 1
1
Ma
r 1
2
Jun 1
2
Sep 1
2
Dec 1
2
Ma
r 1
3
Jun 1
3
Sep 1
3
Dec 1
3
Ma
r 1
4
Jun 1
4
Sep 1
4
Dec 1
4
Ma
r 1
5
Jun 1
5
Sep 1
5
Dec 1
5
Ma
r 1
6
US New Housing Starts 3MMA YoY US New Housing Permits 3MMA YoY
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
13%
14%
14%
15%
15%
16%
16%
Aluminium demand in Construction (kt) Construction as percentage of total demand
Source: Deutsche Bank, Bloomberg Finance LP
Source: Deutsche Bank, Wood Mackenzie
India’s demand story remains a bright spot in aluminum, with the power sector
being particularly strong. The Power Grid Corporation of India (PGCIL) has
operationalised its ultra-high Voltage 1200Kv test station in May at Bina in
Madhya Pradesh. This is the highest voltage transmission line in India and will
cater to the needs of bulk power transmission over long distances. This project
will be monitored for two years before the Central Electricity Authority decides
on replacing 400Kv lines across the country with 1200Kv lines. The first
construction by Power Grid is planned for a 1200kV Transmission Line
between Wardha & Aurangabad (Line length 400 kM, Rs 800 Crores ). A
1200kv line can carry 6000MW (10 times more than 400Kv line). Wood
Mackenzie estimates Indian primary aluminium demand to rise by 6% in 2016,
rising to about 9% by 2018, driven in part by the increased focus on power
projects and village electrification.
15 June 2016
Metals & Mining
Aluminium market update
Deutsche Bank AG/London Page 7
Figure 16: Indian aluminium demand by sector in 2016e Figure 17: Indian aluminum demand to double over the
next 10 years
Building & Construction
25%
Transport22%Electrical
27%
Packaging10%
Consumer Goods5%
Machinery & Equipment
5%Other6%
-
1,000
2,000
3,000
4,000
5,000
6,000
Building & Construction Transport Electrical
Packaging Consumer Goods Machinery & Equipment
Other
kt
Source: Deutsche Bank
Source: Deutsche Bank
Supply is still a problem
The current Chinese spot aluminium price of c.RMB12,200/t means that most
of the Chinese production base is now profitable. As the domestic price
recovered post the end November low of RMB9,750/t and started to approach
RMB11,500/t, news of capacity reactivation started to increase. Given the
41Mt production capacity in China, keeping track of supply additions, restarts
and supply cuts can be challenging. It is however clear that curtailments (we
estimate c.4.3Mt in 2015) outstripped restarts for most of 2015 and into Q1’16,
by a fairly wide margin. However capacity additions still meant that Chinese
production increased by 10.5% in 2015.
Figure 18: China aluminium cost curve Q2’16 Figure 19: Estimating the smelter shutdowns and re-
starts up to Q1’16
0
1,500
3,000
4,500
6,000
7,500
9,000
10,500
12,000
13,500
15,000
0 5,000 10,000 15,000 20,000 25,000 30,000
RMB/t
kt
-190 -150-210
-75 -38
435 535
1420
1953
330
-500
0
500
1,000
1,500
2,000
Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016
Restarts Curtailment
kt
Source: Deutsche Bank, Wood Mackenzie
Source: Wood Mackenzie
Part of the problem is the willingness by local governments to lower power
tariffs to those producers buying from the grid (about 30% of domestic
production). Two recent examples are the Zhaofeng aluminium smelter in
Shanxi province of China which is in the process of restarting 120ktpa of
smelting capacity in May. The company has indicated that significant power
cost reductions of around 46%, due to direct power purchase approval, has led
to the decision to restart capacity. The power cost of the smelter has reduced
15 June 2016
Metals & Mining
Aluminium market update
Page 8 Deutsche Bank AG/London
from CNY0.53/kWh (US8.2¢/kWh) in 2015, down to CNY0.3/kWh
(US4.6¢/kWh). The smelter has brought 40 of 156 reduction cells online and
expects to see the 120ktpa potline fully operational by August. The
government of Yunnan province in China has announced that it is providing
assistance to Yunnan Aluminum Holdings for it to lower its total smelting
power costs from the previous CNY0.35/kWh (US5.4c/kWh). This is under
review until May 2017, with components being a direct hydropower supplier
purchase agreement (at CNY0.185/kWh, US0.3c/kWh), a tariff fee
(CNY0.045/kWh, US0.1c/kWh) and support from a government fund
(CNY0.0485/kWh, US0.1c/kWh) to bring the cost of power to below
CNY0.2785/kWh (US4.3c/kWh). The government may continue to assist
Yunnan Aluminum Holdings until a further CNY0.019/kWh reduction in its
power cost has been achieved.
As illustrated in the summary table below, we have noted Qingtongxia
Aluminium, Dongxin Aluminium and Huanghe Xinye resumed their idled
capacity in late March and smelters such as Taiyuan Donglv, Shanxi Zhaofeng
Aluminium and Liancheng Aluminium are in the process of restarting.
Figure 20: Curtailments and restarts summary
Region Company (in English) Company (in Chinese) Capacity shut down (kt)
Restart (kt) Restarts time
Chongqing Chongqing Tiantai Aluminium 重 天泰 100
Chongqing Chongqing Tengtai Aluminium 重 滕泰 30
Chongqing Qineng Electricity and Aluminium Co., Ltd 旗能 股份有限公司 40
Fujian Fujian Nanping Aluminium 福建南平 40
Gansu Liancheng Plant of Chalco 中国 城分公司 182 100 2H16
Gansu Gansu Hualu Aluminium 甘 235
Gansu Jiayuguan Branch of Dongxing Aluminium 嘉峪关 200 200 Mar-16
Guangxi Guangxi Xiangji Non-ferrous Metal 广西翔吉有色金属有限公司 40
Guizhou Jinlan Weiming Aluminium 金 明 有限公司 75
Guizhou Liupanshui-Shuangyuan Aluminium 六 水-双元 40
Guizhou Yulong Aluminium 玉隆 10
Guizhou Jinlan Weiming Aluminium 金 明 有限公司 10
Henan Henan Xichuan Aluminium Group 河南淅川 集 有限公司 140
Henan Shangqiu Plant of Henan Shenhuo 河南神火商丘 厂 60
Henan Zhengzhou Faxiang Aluminium 州 祥 公司 27
Henan Sanmenxia Hengkang Aluminium 三 峡恒康 240
Hubei Changjiang Aluminium 宜昌 江 有限公司 35
Hunan Chuangyuan Aluminium 湖南 元 150
Inner Mongolia Tongshun Aluminium 通 50
Inner Mongolia Baotou Aluminium 方希望包 稀土 60
Liaoning Fushun Aluminium 297
Ningxia Qingtongxia Aluminium 青 峡 集 270 270 Mar-16
Qinghai Hualong Xianqi Aluminium 化隆先奇 65
Qinghai Yellow River Hydro Renewable Aluminium 青海黄河水 再生 250
Qinghai Yellow River Xinheng Aluminium 青海鑫恒 40
Qinghai Xinye Subsidiary of Yellow River Hydropower 黄河上游水 鑫 分公司 110 50 Mar-16
Qinghai Baihe Aluminium 百河 20
Qinghai Qinghai Jinyuan Aluminium 青海金源 100
Shaanxi Longxi Branch of Dongxing Aluminium 西 150
Shandong Ke'Ao Aluminium 山 省 集 科澳 20
Shandong Zouping Qixing Aluminium 山 平 星 60
Shandong Shandong Weiqiao 山 魏 250
Shanxi Taiyuan East Aluminium 太原 50 100 May/Aug 16
15 June 2016
Metals & Mining
Aluminium market update
Deutsche Bank AG/London Page 9
Shanxi Shanxi Zhaofeng Aluminium 山西兆丰 冶有限公司 30 120 Jul-16
Sichuan Sichuan Qimingxing Aluminium 四川眉山启明星 50
Sichuan Sichuan Qiya Aluminium 四川其 170
Sichuan Aba Plant, Bosai Group 博 集 阿 厂 67
Sichuan Sichuan Qimingxing Aluminium 四川启明星 股份有限公司 60
Xinjiang Xinjiang Zhonghe 新疆众和股份 95
Yunnan Qujing Aluminium 云南 源煤 集 曲靖 公司 150
Yunnan Yunnan Aluminium 云南 200
Yunnan Qujing Aluminium 云南 源煤 集 曲靖 公司 55
Total in 2015 4,323 840 Source: Deutsche Bank, SMM, Antaike, China Non-ferrous Association, SMM, Myyouse
We estimate that restarts could amount to 1.45Mt by the end of 2016.
In summary we estimate that so far this year, a further 170kt of capacity has
been shut down, new capacity in started up so far amounts to 1.22Mt, with a
further 1,92Mt still to come. So restarts have amounted to c.400kt with a
further 1Mt of restarts expected.
Figure 21: Tracking Chinese aluminium restarts and additions
2016 YTD Total Primary Aluminum Capacity Summary (kt)
Capacity shutdown 173
New capacity in operation 1,220
New capacity yet to start operation 1,920
Restarts 405
Restarts to be expected 1,037
Capacity expansion delays 1,100
Source: Deutsche Bank, SMM, alu.cn, SCI Group
We expect the capacity addition rate (+4Mtpa in 2016) to slow to roughly
2.8Mt in 2017.
Figure 22: New capacity addition in 2017
Company (Chinese) Company Region New capacity (kt) Time Comment
中国宏 China Hongqiao Shandong 200 2017
新疆 方希望 East Hope Xinjiang 300 2017
内蒙包 Baotou Aluminium Inner Mongolia 500 2017
内蒙古 源 Chuangyuan Inner Mongolia 800 2017
内蒙古霍煤 Huimei Hongjun Inner Mongolia 430 2017
阜康天 Tianlong Aluminium Xinjiang 100 2017
山西中 Chalco-HuaRun Shanxi 500 2017
Total in 2017 2,830 Source: Deutsche Bank, Shanghai Metal Markets, Nanchu, Asian Metal
As illustrated in Figure 23 below, most of the upcoming capacities either sit in
coal-abundant areas such as Xinjiang, Inner Mongolia and Shanxi, or close to
end-users in coastal areas like Shandong, with an estimated cash cost from
c.RMB8,500/t to RMB10,000/t.
15 June 2016
Metals & Mining
Aluminium market update
Page 10 Deutsche Bank AG/London
Figure 23: China new capacities by region
Source: Deutsche Bank, Shanghai Metal Markets, Nanchu, Asian Metal
Shandong is now the largest producing region in China, followed very closely
by the Xinjiang province.
Figure 24: Chinese provincial capacity versus the average total cost
10,000
10,700
11,400
12,100
12,800
13,500
14,200
0%
5%
10%
15%
20%
25%
30%
Total Production (kt) Average Total Cost (kt)
Source: AZ Minerals
Capacity additions from the rest of the world will continue to be modest in our
view, with the main additions coming from India, specifically Vedanta. In
January, the company received approval from the regulatory authorities (Orissa
Electricity Regulatory Commission) to use the power generated from three
units of the 2,400 MW (4 x 600 MW) Jharsuguda power plant for captive use
which would enable full ramp-up of the 1.25 mtpa Jharsuguda-II smelter. The
company has commenced the ramp-up of the first pot line of 312.5kt from 1
April 2016.
The 325 kt Korba-II smelter produced 19.2kt tonnes during Q4 FY2016 with 84
pots operational. Pre-commissioning activities have commenced for further
ramp up from the end of April 2016. The second 300 MW unit of the 600 MW
CPP was commissioned during March 2016. The impact of these additions will
15 June 2016
Metals & Mining
Aluminium market update
Deutsche Bank AG/London Page 11
be seen in 2017 as opposed to 2016. We expect modest capacity net additions
from the world ex China (<1%) as closures in the US offset additions elsewhere.
Figure 25: Aluminium capacity additions from the rest of
the world…
Figure 26: …led by India, especially in 2017
-15%
-10%
-5%
0%
5%
10%
15%
20,000
21,000
22,000
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
kt
-600
-400
-200
0
200
400
600
800
1,000
North America
LatAm India Middle East
Australia Eastern Europe
Western Europe
Other Asia
2016E 2017E 2018E
Source: Deutsche Bank
Source: Deutsche Bank
The recovery in Chinese domestic production has been confirmed by data from
the International Aluminium Institute, with the average daily April output of
85.6kt/day up 1.3% from the March output level. In contrast, output from the
world ex China fell slightly as the US closures began to take effect.
Figure 27: Global aluminium output
80
90
100
110
120
130
140
150
160
170
20
30
40
50
60
70
80
90
100
ROW aluminium output China aluminium output
Global aluminium output - rhs
kt/dkt/d
Source: Deutsche Bank, IAI
Chinese exports will come roaring back
We have long argued that whilst most of the innovation in the aluminium
industry is coming from China, the country is becoming more efficient and
competitive at aluminium production. Why then should China not export this
competitive advantage? One could argue that the Chinese costs do not
currently reflect the full environmental cost of carbon emissions, but given the
strides made in moving the energy mix towards renewable sources, we think
this argument will lose weight over time. Chinese semi’s exports for the first
four months are down 8% versus last year, partly a reflection of a tighter
15 June 2016
Metals & Mining
Aluminium market update
Page 12 Deutsche Bank AG/London
domestic market, but also due to the more limited arbitrage opportunities. As
the domestic price declines from the weight of additional supply, we expect
the arbitrage to open up once more, and exports to pick up again.
Figure 28: Chinese semi’s exports Figure 29: Chinese exports of flat rolled products to the
US and Canada
0
100
200
300
400
500
600
May-1
0
Au
g-1
0
No
v-1
0
Feb
-11
May-1
1
Au
g-1
1
No
v-1
1
Feb
-12
May-1
2
Au
g-1
2
No
v-1
2
Feb
-13
May-1
3
Au
g-1
3
No
v-1
3
Feb
-14
May-1
4
Au
g-1
4
No
v-1
4
Feb
-15
May-1
5
Au
g-1
5
No
v-1
5
Feb
-16
May-1
6China Aluminium Semis exports
kt
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
0
10
20
30
40
50
60
Jan 1
1
Mar
11
May 1
1
Jul 11
Sep 1
1
Nov 1
1
Jan 1
2
Mar
12
May 1
2
Jul 12
Sep 1
2
Nov 1
2
Jan 1
3
Mar
13
May 1
3
Jul 13
Sep 1
3
Nov 1
3
Jan 1
4
Mar
14
May 1
4
Jul 14
Sep 1
4
Nov 1
4
Jan 1
5
Mar
15
May 1
5
Jul 15
Sep 1
5
Nov 1
5
Jan 1
6
Mar
16
Foil PSS Y-o-Y % change -RHS
kt
Source: Deutsche Bank, Bloomberg Finance LP
Source: Deutsche Bank, Wood Mackenzie
A fall in container shipping rates have helped Chinese exporters. Although
freight rates have picked up slightly since reaching record lows in March, they
remain low due to ample supply of vessels/containers and weak growth in
demand. The cost per tonne for an average forty-foot equivalent unit (FEU) 20
tonnes container has halved during the past 12 months and at the time of
writing was quoted at US$45/t and US$85/t for delivery from Shanghai to the
US West and East coast, respectively. Given that the current implied arbitrage
is close to zero however, we would not expect a significant increase exports in
the near term.
Figure 30: Container freight rates for Shanghai to the US Figure 31: There is limited semi’s export profitability at
current pricing
0
50
100
150
200
250
300
Jun 1
1
Aug 1
1
Oct 11
Dec 1
1
Fe
b 1
2
Apr
12
Jun 1
2
Aug 1
2
Oct 12
Dec 1
2
Fe
b 1
3
Apr
13
Jun 1
3
Aug 1
3
Oct 13
Dec 1
3
Fe
b 1
4
Apr
14
Jun 1
4
Aug 1
4
Oct 14
Dec 1
4
Feb 1
5
Apr
15
Jun 1
5
Aug 1
5
Oct 15
Dec 1
5
Fe
b 1
6
Apr
16
Shanghai to LA Shanghai to NY
0
100
200
300
400
500
600
-400
-200
0
200
400
600
800
Export semi's arb less container rates (USD/t) - lhs Aluminium semi's exports (kt)
Source: Deutsche Bank, Bloomberg Finance LP
Source: Deutsche Bank, Bloomberg Finance LP
15 June 2016
Metals & Mining
Aluminium market update
Deutsche Bank AG/London Page 13
China will continue to drive global prices.
A weaker RMB is a real risk in the near term.
As the largest producer of primary aluminum, and increasingly a supplier to the
world via semi’s exports, we expect China to continue being a strong influence
on global aluminium prices. The rush of closures when the price fell below
RMB10,000/t, and the increasing restarts above RMB11,500/t gives us a good
gauge as to the Chinese price tolerance. In the absence of exceptional demand
outside of China or further capacity cuts, the LME price is likely to be heavily
influenced by the Chinese domestic price. Over the past six months, the
recovery in Chinese prices have simply stabilized LME prices, with a modest
c.USD100/t recovery off the lows. We would argue that in the near term LME
prices should play a bit of catch up.
Figure 32: Chinese domestic prices (converted to USD) Figure 33: LME price including US MidWest premiums
0
50
100
150
200
250
300
350
400
450
1,500
2,000
2,500
3,000
Shanghai price All in Shanghai price Premium
USD/t
0
100
200
300
400
500
600
1,400
1,900
2,400
2,900
LME price All in price US MidWest premium - rhs
USD/tClosures accelerate
Source: Deutsche Bank, Bloomberg Finance LP
Source: Deutsche Bank, Bloomberg Finance LP
The key risk to further pressure on the LME price even in a stable Chinese price
is a depreciating RMB. We continue to expect the RMB to gradually weaken
possibly reaching 7 to the USD by the end of the year. Ironically the LME
aluminium price has led the movements in the RMB, but there is no doubt that
more recently the aluminium price has become more sensitive to the RMB.
Figure 34: The CNY has once again begun to depreciate
against the USD
Figure 35: LME to SHFE price discount: widening once
more
1,400
1,500
1,600
1,700
1,800
1,900
2,000
2,100
2,200
2,300
2,4005.7
5.8
5.9
6
6.1
6.2
6.3
6.4
6.5
6.6
6.7
Jan 1
2
Mar
12
May 1
2
Jul 12
Sep 1
2
Nov 1
2
Jan 1
3
Mar
13
May 1
3
Jul 13
Sep 1
3
Nov 1
3
Jan 1
4
Mar
14
May 1
4
Jul 14
Sep 1
4
Nov 1
4
Jan 1
5
Mar
15
May 1
5
Jul 15
Sep 1
5
Nov 1
5
Jan 1
6
Mar
16
May 1
6
CNY
USD/t - inverse scale
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Jan 0
9
Ap
r 0
9
Jul 09
Oct 0
9
Jan 1
0
Ap
r 1
0
Jul 10
Oct 1
0
Jan 1
1
Ap
r 1
1
Jul 11
Oct 1
1
Jan 1
2
Ap
r 1
2
Jul 12
Oct 1
2
Jan 1
3
Ap
r 1
3
Jul 13
Oct 1
3
Jan 1
4
Ap
r 1
4
Jul 14
Oct 1
4
Jan 1
5
Ap
r 1
5
Jul 15
Oct 1
5
Jan 1
6
Ap
r 1
6
Source: Deutsche Bank, Bloomberg Finance LP
Source: Deutsche Bank, Bloomberg Finance LP
15 June 2016
Metals & Mining
Aluminium market update
Page 14 Deutsche Bank AG/London
Coming to the end of deflation? We expect a deflationary bias in aluminium
The latest cost data from Wood Mackenzie would suggest not. The median
industry cost has fallen by USD85/t to USD1,300/t between Q1 and Q2, due to
a combination of falling alumina costs and energy prices. Typically there is a
lag of at least one quarter between the spot alumina price and the individual
aluminium smelter’s purchase price. Likewise, energy prices tend to lag the
prevailing energy process. However, domestic smelters have been benefitting
from lower tariffs, and those with integrated capacity from lower coal prices.
Our view is that Q2 is the bottom in terms of costs for the median smelter.
However the marginal smelters are likely to continue receiving local
government assistance.
Figure 36: Chinese domestic (NAX and SAX unadjusted
in US$/t) and Australian (US$/t FOB) alumina price
Figure 37: Thermal coal QHD price for 5,500kcal –
recovering from the lows
150
200
250
300
350
400
450
500
Jan/12 Jul/12 Jan/13 Jul/13 Jan/14 Jul/14 Jan/15 Jul/15 Jan/16
US$/t Chinese (NAX) (USD/t)
Chinese (SAX) (USD/t)
Seaborne (Australia)
300
400
500
600
700
800
900
1,000
1,100
Ma
y-0
8
Se
p-0
8
Ja
n-0
9
Ma
y-0
9
Se
p-0
9
Ja
n-1
0
Ma
y-1
0
Se
p-1
0
Ja
n-1
1
Ma
y-1
1
Se
p-1
1
Ja
n-1
2
Ma
y-1
2
Se
p-1
2
Ja
n-1
3
Ma
y-1
3
Se
p-1
3
Ja
n-1
4
Ma
y-1
4
Se
p-1
4
Ja
n-1
5
Ma
y-1
5
Se
p-1
5
Ja
n-1
6
Ma
y-1
6
RMB/t
Source: Deutsche Bank, Platts, CM Group, Platts. Note: NAX (Northern China), SAX (Southern China)
Source: Wind, SX Coal
If we take the marginal Chinese smelter in Northern China reliant on grid
power, we assume that power tariffs are reduced to c.USD45/MWhr, and that
current efficiency improves from 14MWhr/t to 13.5MWhr/t. This would reduce
power costs from USD770/t to USD610/t. Alumina costs are likely to increase
from the Q1 lows of USD210/t. The other cost components are likely to see
some modest inflation, we assume 5%. The combination of all these moving
parts would reduce C1 cash costs by 6% to USD1,677/t. However, if the RMB
were to continue weakening, as we expect it to, this will reduce costs even
further.
15 June 2016
Metals & Mining
Aluminium market update
Deutsche Bank AG/London Page 15
Figure 38: C1 cash cost breakdown of the marginal
Chinese smelter
Figure 39: Global aluminium cost curve: Q2’16 versus
Q1’16
Delivered Alumina cost30%
Raw Materials18%
Energy43%
Labour2%
Other7%
0
500
1,000
1,500
2,000
2,500
0 10,000 20,000 30,000 40,000 50,000
2016_Q2 2016_Q1
USD/t
kt
Source: Deutsche Bank, Wood Mackenzie
Source: Deutsche Bank, Wood Mackenzie
Aluminium supply demand models
Figure 40: China aluminium demand model
Demand sector 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Building & Construction
kt 5,675 6,347 7,435 7,864 8,857 9,689 10,104 10,710 11,032 11,142
YoY growth % 11.8% 17.1% 5.8% 12.6% 9.4% 4.3% 6.0% 3.0% 1.0%
Transport kt 2,683 3,930 5,191 5,602 6,195 7,069 7,541 8,279 8,947 9,596
YoY growth % 46.5% 32.1% 7.9% 10.6% 14.1% 6.7% 9.8% 8.1% 7.2%
Electrical kt 2,364 2,650 2,779 3,217 3,779 4,184 4,450 4,895 5,385 5,654
YoY growth % 12.1% 4.9% 15.8% 17.5% 10.7% 6.4% 10.0% 10.0% 5.0%
Packaging kt 1,294 1,448 1,676 2,570 2,877 3,020 3,220 3,445 3,704 3,982
YoY growth % 11.9% 15.7% 53.3% 11.9% 5.0% 6.6% 7.0% 7.5% 7.5%
Consumer Goods kt 3,325 3,758 4,663 5,171 5,715 6,269 6,610 6,742 6,944 7,222
YoY growth % 13.0% 24.1% 10.9% 10.5% 9.7% 5.4% 2.0% 3.0% 4.0%
Machinery & Equipment
kt 1,918 2,154 2,554 2,640 3,054 3,402 3,634 3,707 3,633 3,705
YoY growth % 12.3% 18.6% 3.4% 15.7% 11.4% 6.8% 2.0% -2.0% 2.0%
Other kt 1,042 1,166 1,350 1,547 1,739 1,936 2,066 2,169 2,278 2,414
YoY growth % 11.9% 15.8% 14.6% 12.4% 11.3% 6.7% 5.0% 5.0% 6.0%
Total kt 18,301 21,453 25,648 28,611 32,216 35,569 37,625 39,948 41,922 43,715
YoY growth % 17.2% 19.6% 11.6% 12.6% 10.4% 5.8% 6.2% 4.9% 4.3%
Primary Consumption 13,937 16,183 18,902 21,233 23,941 26,345 27,975 29,912 31,384 32,756
YoY growth 16.1% 16.8% 12.3% 12.8% 10.0% 6.2% 6.9% 4.9% 4.4%
Secondary Consumption
4,364 5,270 6,746 7,378 8,275 9,225 9,650 10,036 10,538 10,959
YoY growth 20.8% 28.0% 9.4% 12.2% 11.5% 4.6% 4.0% 5.0% 4.0%
Source: Deutsche Bank, SMM, Wood Mackenzie
15 June 2016
Metals & Mining
Aluminium market update
Page 16 Deutsche Bank AG/London
Figure 41: Global primary aluminium supply demand model
2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Primary Aluminium
Chinese Production Mt 22.5 24.9 27.6 30.5 32.3 33.7 34.7 35.7 36.7 37.6 38.2 38.7 39.2 39.7
growth % 14% 11% 11% 11% 6% 4% 3% 3% 3% 2% 2% 1% 1% 1%
Russia Production Mt 4.0 3.7 3.5 3.5 3.6 3.7 3.7 4.0 4.4 4.8 5.0 5.0 5.0 5.0
growth % 1% -7% -7% 1% 1% 3% 1% 8% 10% 10% 4% 0% 0% 0%
Middle East Production Mt 4.0 4.3 5.2 5.4 5.5 5.6 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7
growth % 5% 6% 21% 5% 1% 1% 2% 1% 0% 0% 0% 0% 0% 0%
Europe & N. American Production Mt 8.5 8.5 8.2 8.2 7.8 7.9 8.0 8.0 8.0 8.4 8.4 8.4 8.4 8.4
growth % -6% 1% -4% 0% -5% 2% 1% 1% 0% 4% 0% 0% 0% 0%
Global Production Mt 48.2 50.6 53.4 56.7 58.7 61.4 63.3 65.4 67.4 69.1 71.6 73.1 74.9 76.9
growth % 4.4% 5.0% 5.5% 6.2% 3.5% 4.7% 2.9% 3.4% 3.1% 2.5% 3.6% 2.0% 2.6% 2.6%
Global Capacity Mt 53.1 55.7 60.1 65.6 67.7 71.7 74.1 75.6 76.9 78.1 78.9 79.4 79.5 79.7
utilisation rate % 91% 91% 89% 86% 87% 86% 85% 86% 88% 89% 91% 92% 94% 96%
Primary Aluminium Consumption
China Consumption Mt 21.5 23.9 26.3 28.0 29.9 31.4 32.8 34.1 35.5 36.7 37.8 38.6 39.4 40.2
growth % 10.4% 11.3% 10.0% 6.2% 6.9% 4.9% 4.4% 4.2% 4.0% 3.5% 3.0% 2.0% 2.0% 2.0%
China net imports (exports) Mt 0.0 -0.3 -0.8 -2.5 -2.4 -2.3 -1.9 -1.6 -1.2 -0.8 -0.4 -0.1 0.1 0.4
Developing economies (ex China) Mt 11.3 11.5 12.1 12.3 12.7 13.4 14.0 14.6 15.3 15.9 16.6 17.4 18.1 18.9
growth % 1% 2% 5% 2% 2% 2% 4% 4% 4% 4% 4% 4% 4% 4%
North America Mt 5.9 6.0 6.3 6.6 6.8 7.0 7.1 7.2 7.4 7.5 7.6 7.7 7.8 7.9
growth % 8.8% 0.9% 5.4% 4.1% 3.9% 2.7% 1.7% 1.7% 2.8% 0.9% 1.4% 1.2% 1.2% 1.2%
EU 15 Mt 8.4 8.5 8.8 9.0 9.1 9.3 9.5 9.7 9.9 10.1 10.3 10.5 10.8 11.0
growth % 1% 1% 3% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%
OECD Consumption Mt 14.6 14.5 15.1 15.4 15.7 15.9 16.2 16.4 16.7 16.8 17.0 17.2 17.3 17.5
growth Mt 4% 0% 4% 2% 2% 1% 2% 2% 2% 1% 1% 1% 1% 1%
Global Consumption Mt 47.4 50.0 53.6 55.7 58.3 60.7 62.9 65.2 67.5 69.5 71.5 73.1 74.8 76.6
check 47.4 50.0 53.6 55.7 57.6 59.5 61.2 63.2 65.1 66.8 68.5 70.0 71.3 72.7
growth % 6.2% 5.5% 7.1% 4.1% 4.7% 4.0% 3.7% 3.5% 3.5% 3.0% 2.8% 2.3% 2.3% 2.3%
Production adjustments Mt 0 0 0 0 0 195 493 1,069 1,293 1,895 2,185 3,543 5,002
Market balance Mt 0.76 0.58 -0.17 0.96 0.34 0.76 0.31 0.22 -0.02 -0.35 0.14 -0.07 0.11 0.30
Avg. LME cash price $/t 2,052 1,889 1,893 1,664 1,538 1,595 1,700 1,806 1,911 2,016 2,121 2,153 2,185 2,218
Avg. LME cash price c/lb. 93 86 86 75 70 72 77 82 87 91 96 98 99 101
Source: Deutsche Bank, Wood Mackenzie, SMM
15 June 2016
Metals & Mining
Aluminium market update
Deutsche Bank AG/London Page 17
Appendix 1
Important Disclosures
Additional information available upon request
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The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Grant Sporre/Sharon Ding
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock
Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.
Newly issued research recommendations and target prices supersede previously published research.
45 % 48 %
7 %34 % 30 %
19 %0
200
400
600
800
1000
1200
1400
1600
Buy Hold Sell
Global Universe
Companies Covered Cos. w/ Banking Relationship
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15 June 2016
Metals & Mining
Aluminium market update
Page 18 Deutsche Bank AG/London
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Metals & Mining
Aluminium market update
Deutsche Bank AG/London Page 19
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15 June 2016
Metals & Mining
Aluminium market update
Page 20 Deutsche Bank AG/London
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David Folkerts-Landau Chief Economist and Global Head of Research
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Research
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