Russian aluminum producer Rusal said Monday that it is bullish on the near term prospects for the aluminium market and believes that the price is undervalued.
"A number of influential factors that have emerged in recent weeks cause the company to become increasingly bullish about the near term prospects for the aluminium price and Rusal believes a convergence of physical and technical factors are now causing a realization amongst industry participants and investors that the price is undervalued," Rusal said in a statement.
The company noted that the aluminium market is forecast to record a deficit of approx 1.2 million mt this year and a further 985,000 mt deficit in 2015, with limited opportunities for capacity additions outside China beyond 2015.
In China, the company sees demand of 25.5 million mt, broadly in balance with production and growing by approximately 10% in 2014.
"Capacity additions of approx 2.4 million mt that, according to the company's estimates, have been introduced in 2014 year-to-date have been offset by 2.1 million mt of capacity closures due to uneconomic smelter operations," Rusal said.
It also sees the Indonesian export ban on raw materials as a factor that needs to be reconsidered in relation to reduced bauxite exports for the aluminium industry.
"In the 2013, more than 4 million mt per month of Indonesian bauxite was shipped to China and is the basis for 10 million mt of annualized aluminium production (20% of global production). This has fallen to only 4 million mt year-to-date in 2014," the company noted.
LME warehouse stocks are also at their lowest level in 13 months and the level of "on warrant" stock is the lowest in five years.
"The lack of deliveries to warehouse are the most telling, with no deliveries into Detroit [in the US] since early March and only Vlissingen [in the Netherlands] receiving metal since April," it said.
The structure of the stocks has also shifted significantly in the past 12 months with canceled warrants (i.e. metal that has been designated for load out of the warehouse for future consumption) representing 55% of all LME stocks, Rusal added.
In addition, recent trading activity on the LME is seen as supportive for aluminium in the short term, with $1,840/mt seen as a bottom for prices.
"Taking a closer look at trading throughout the past three days, the technical resistance at $1,850/mt was very strong and is part of a long term down trend that was last tested in April at $1,900/mt," Rusal noted.
When the price moved through $1,850/mt on Friday, "stops" were triggered that initiated significant trading volume, seeing the covering of previous short positions and the creation of new longs.
Likewise, the cash to three-month contango also closed at a six-week low (and close to an 18-month low of $22/mt) as an indication of tighter market conditions and the rolling forward of speculative short positions.
"In summary, a combination of physical factors... as well as constructive pricing factors... causes Rusal to assert that aluminium is entering a new bullish phase that could see prices tested at $1,900/mt this week and potentially $2,000/mt during the next few months," Rusal said.
Three-months aluminium was trading at $1,832/mt on LMEselect at 0832 GMT Monday.
