The global aluminum market is moving into its first annual deficit in six years as producers look to restructure in response to continued low prices, JP Morgan said in a research note Tuesday.
"We expect the global aluminum market will move into a deficit of 176,000 mt this year and a modest surplus of 183,000 mt next year. For China, we expect a surplus of 1.1 million mt in 2014 and 0.75 million mt in 2015. The world outside of China will likely remain in a deficit of 1.3 million mt this year and 0.57 million mt next," JP Morgan said.
The bank said that outside of China, Africa and the Middle East, output is falling as producers target idling higher-cost capacity.
However, in other regions production is booming with an increase in the Middle East of 14% year on year in the first quarter of 2014 on expansions at the EMAL smelter in Abu Dhabi and the Ma'aden smelter in Saudi Arabia.
"But even this exceptional result in the Middle East was not enough to offset the declines elsewhere: combined aluminum production in the world outside of China fell by 2% year on year in Q1 -- a second consecutive quarter of negative growth," the bank added.
JP Morgan is forecasting a deficit of 3.7 million mt in the US and a deficit of 4 million mt in Europe this year.
In China, aluminum prices have been trading below Yuan 13,500/mt ($2,168/mt) since the beginning of the year. This is below an average price of Yuan 14,344/mt in the depths of the financial crisis.
"The current level of aluminum prices is placing Chinese smelters under enormous pressure, with more than 10 million mt (41%) of Chinese capacity unprofitable on a cash basis...We expect that loss-making aluminum smelters will struggle to maintain solvency and will increasingly find it hard to source loans," the bank said.
JP Morgan believes that around 30% of Chinese capacity is at risk of closure over the next three years.
The bank also said that China's State Bureau Reserve (SRB) appears to have been absent from the market so far this year, adding that if the SRB does not announce any purchases, it might be a signal that state support for the aluminum sector has ebbed.
Three-months aluminum was trading at $1,785/mt on LMEselect at 0930 GMT Tuesday.
