The global aluminium market has seen a remarkable improvement in its fundamental outlook, Bank of America Merrill Lynch said in a research note Thursday.
"The improvement in market balances has perhaps been most outstanding for aluminium, which is set to be flipping into deficit in world ex-China after multi-year structural surpluses," BofA Merrill Lynch said.
The bank notes that much of this has been driven by production cuts ex-China with the US, Europe and Russia having made curtailments at various aluminium smelters.
However, BofA Merrill Lynch underlines the fact that China is lagging behind other global producers.
"Switching focus slightly, the aluminium industry in China, which has seen some of the most rapid production growth in recent years, has stood somewhat apart from developments in world ex-China," it said.
The bank notes that where higher cost smelters have closed in China, any output losses have been offset by investment in new and more efficient smelting capacity.
As a result, the Chinese aluminium market remains much better supplied.
Another development that is likely to be beneficial for aluminium prices is the warehousing situation on the London Metal Exchange.
BofA Merrill Lynch believes that the situation is likely to start to see very gradual improvement as queues at the exchange's warehouses have reduced incentives for aluminium buyers to tap stocks.
"Upcoming changes to LME regulations have in our view already led to subtle changes in the market. For instance, there is some anecdotal evidence that the popularity of financing deals has declined," the bank said.
In addition, Indonesia's ban on raw material exports that includes bauxite has caused significant uncertainty, especially in China which has long been one of the biggest buyers of Indonesian bauxite.
Bauxite is the primary raw feed material used in the production of aluminium, which is refined into alumina before being smelted into aluminium.
However, the bank expects any impact on the global market to be limited.
"While Indonesia's export ban does make it difficult for China's alumina refiners and could ultimately help a slowdown in aluminium production growth, we believe the immediate implications for aluminium output are limited," it said.
BofA Merrill Lynch is forecasting an average price of $1,720/mt in the third quarter, rising to average $1,900/mt in the fourth quarter of 2014.
Three-months aluminium was trading at $1886.50/mt on LMEselect at 0936 GMT Thursday.
