Higher aluminum prices have prompted some Chinese smelters to abandon production cutbacks and are seen leading to restarts of other plants, chipping away at what was expected to be the first global deficit after years of oversupply.
A rally in London Metal Exchange futures contracts this year plus record premiums, or charges to obtain physical material, have sharply improved the financial stance of many smelters that were in the red last year.
"The profitability of the industry has dramatically improved this year, from losing money to being cash-positive ... so the next risk is to get restarts," Stephen Briggs, a metals strategist at BNP Paribas in London, said.
"Quite quickly the industry can get to a position where the deficit gets smaller."
The benchmark aluminum price on the LME CMAL3 surged 27 percent in the seven months to the end of August to an 18-month peak. It has since given up some of those gains but is still up about 10 percent so far this year.
The rally was partly driven by speculators, who expected the market to swing into deficit this year after many years of overproduction and surpluses.
The consensus median forecast of analysts polled by Reuters in July was for a surplus of 235,500 metric tons this year, moving to a deficit of 4,444 tons in 2015. A significant minority of analysts expected a deficit in both years.
Those deficit forecasts were partly based on moves by aluminum producers around the world in recent years to slash capacity by millions of tons, but analysts may have to rejig their estimates as some smelters start firing up again.
Chinese restarts are the main focus, since many high-cost smelters were hit hard by the price declines but have now moved into the black.
So far this year, some 1.3 million tons of annual capacity has gone back online in China, according to Richard Lu at consultancy AZ China in Beijing.
"We suppose there might be some small additional restarts in the northwest like Gansu province ... and the (restarts) number for the full year will be about 1.6 million tons per annum," he said.
Chinese primary aluminum output rose 8.8 percent year-on-year to 2.027 million tons in August, the first time it has broken above the 2 million mark, Commerzbank said in a note.
Most of the Chinese restarts have been based on promised government subsidies, Lu said.
So far, there have not been widespread moves to restart shut smelters outside of China, but continued firm prices and strong premiums could tempt some producers, analysts said.
Japanese aluminum premiums were set last week mostly at record highs of $420 a ton, up 70 percent from a year ago, while European and US premiums have been hovering at record levels.
The world's biggest aluminum producer, United Company Rusal, said on Tuesday that about 40 percent of mothballed capacity could be restarted if prices were buoyant.
"I am tipping Rusal will bring a plant back soon, maybe even this year, but Alcoa won't even think about it until the LME is at $2,700," Paul Adkins of AZ China said.
While closed smelters owned by Alcoa Inc would need an LME price of at least $2,500 a ton to make restarting profitable, Rusal could do so at a lower price, Adkins told the Reuters Global Base Metals Forum.
A Rusal spokeswoman, however, said the group would only consider restarting its smelters when the LME price reached $2,500-$2,700 per ton.
"Other key restart drivers will be the alumina cost and the Russian ruble against US dollar exchange rate," the spokeswoman said in an e-mail.
Despite possible restarts, Rusal forecasts a global market deficit of 1.2 million to 1.3 million tons next year, compared with a deficit of 1.5 million tons this year, First Deputy Chief Executive Vladislav Soloviev said on Tuesday.
LME benchmark aluminum was trading at around $1,960 a ton on Thursday
