4 expected shifts in regional aluminum market balances and the premium outlook jorge vázquez harbor...

8/12/2019 4 Expected Shifts in Regional Aluminum Market Balances and the Premium Outlook Jorge Vzquez Harbor Intelligence

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All rights reserved. HARBOR intelligence. 2011. No part of this publication (text, figures, or graphics) may be reproduced, stored, or transmitted whatsoever (electronically, mechanically, recorded, or otherwise) without prior consent in writingfrom HARBOR intelligence. For further subscription information please contact Veronica Medina at +1 (210) 568-7705 or [email protected]. Brief extracts of this publication may be used for the purpose of

commentary or analysis, provided that the information source is also quoted. HARBOR intelligence: 8409 Crown Wood Dr, Laredo, Texas, 78045 USA. Phone (210) -568-7705; Fax (210) 745-2126.

Expected Shifts in Regional Aluminum Market Balances and The Premium Outlook

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2/44

Conclusions>

The global primary aluminum market is already in deficit in both China and ROW.

At the margin, the game changers are China (increasingly importing primary metal and scrap),

The Americas (no greenfield expansions expected until 2016 while Brazil booms), and India (outputless than expected and widening internal needs).

Global competition for material will intensify in the next few years, with the GCC practically theonly region generating additional excess metal at the margin at least until 2015. Surplus in EastEurope, Africa and Oceania will remain unchanged in the next four years.

In consequence, our models suggest we should see rising premiums across the board with

special emphasis in The Americas, as they have the worst geographical position to attract metal.China and India should also see notably higher premiums given the expected size of its needs,although it has a much better position to access the metal from regions with potential surplus.

*

**

*


3/44

DONT TAKE YOUR EYES OFF THE BALL*


4/44

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Veredict (backed by money) is European weakness will continuebut RoW will be fine

Source: HARBOR intelligence with CBOT data


5/44

What is data telling us it is unavoidable

Structural factors driving the aluminum industry>

European economic stagnation is here to stay the power of negative demographics!

Asian demographics, urbanization & industrialization resilient & unprecedented demand

North Americas demographic comeback and pent of demandthe bright spot in the WW

Aluminum demand boom in the transportation the spring of a structural change

Serious obstacles for aluminum supply growth Sustainability, poor economics & nationalism

**

*

*

*


6/44

REGIONAL MARKET BALANCES OUTLOOK*


7/44

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We expect visible primary market deficits of around 1.0 million tons in 11 and 12

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8/44

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Competition for metal among regions will increaseThe Americas and Asia most hit


9/44

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Excess metal to come from Middle East not enough to cover rising needs of importedmaterial in China and the Americas

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10/44

CHALLENGING SUPPLY SIDE VS CONSTRUCTIVEDEMAND PROSPECTS*


11/44

Output capacity expansions around the globe facing increasing challenges

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./0.1-Coal supply constraints-Domestic aluminasupply constraints

-Unfavorable governmentpolicies for the industry

2341/.1- There is no cheap energy at themargin for new projects

-Unfavorable government policies forthe industry

52678 194:.31- No cheap energy for new

projects

- Political issues in Venezuela- Only one greenfieldexpansion hitting the market

but until 2016

38./1-Rising output costs-Unfavorablegovernment policies

for the industry

2784: 15.1- Indonesia/Malaysialikely to increasingly add

to the output equation

/2:78 194:.31-Not cost-competitive vsregions as Middle East and

Indonesia/Malaysia.

-No greenfield/brownfieldexpansions until 2013

:655.1-Long story of under- deliverance-Higher electricity prices aheaddue to market liberalization

9.00;4 4157-Least challenging region-Cheap energy available- It is reasonable to think itwill deliver

:.31- Power infrastructurenot fully developed

- Political instability


12/44

Global working age income rate of growth will accelerate from 2012 on

* Global growth of population between 20 and 49 years old multiplied by GDP per capita at constant 2000 USDSource: HARBOR intelligence with World Bank and United Nations data

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13/44

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14/44

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As a result, the expected underlying global aluminum demand growth rate is amongthe highest the industry has seen

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15/44

The regional concentration of the expected primary demand growth is evident


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16/44

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Our models suggest growing tightness is a structural shift rather than a short term issue

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17/44

GROWING TIGHTNESS IS ALREADY HERE

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18/44

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Indeed, market tightness is already evident in China and the Rest of the World


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19/44

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Aluminum inventory coverage is actually down in key regionsand sharply in China

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20/44

Even assuming all visible inventories were available for consumers, inventorydemand coverage is trending down and below the historical average

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INVENTORYCOVERAGE

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21/44

REGIONAL PREMIUMS OUTLOOK:

WHO WILL SUFFER THE MOST TO ATTRACT METAL?*


22/44

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23/44

tightness should intensify ahead

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24/44


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25/44


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26/44

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as they have the worst geographical position to compete for material

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27/44

REGIONAL FOCUS:

STRUCTURAL CHANGE IN CHINAS SUPPLY SIDE*


28/44

Chinas aluminum output long term underlying trend has weakened since 2007

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29/44

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*Output average cash cost (excludes depreciation, working capital cost, and returnon investment)= 50% of capacity produces at that cost or below, the other 50%above that cost

CHINA OUTPUTCASH COST

SHFE PRICES

We believe a structural change in the supply side has indeed occurred

d) Environment/Pollution Focus

f) Industry Profitability Focus

c) Energy Efficiency Focus

e) Internal Demand Focus

b) Increasing Cost DisadvantageCoal, Alumina, Yuan, Wages

Why a structural changein aluminum output ?

a) Poor Economics

October, 2011

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30/44

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This change became evident in 2010 with emergence of an internal supply deficit thatinitially was met by heavy destocking by semi producers and now by commercial stocks

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31/44

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China will continue to add the most to the output equation in 11-15, but it wont beenough to keep up with domestic demand (even after assuming a slowdown)

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32/44

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HARBOR estimates Xinjiang will struggle to deliver as expected before 2015

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33/44


34/44

How does the region works? Surplus in Latam + Canada, deficit in the US

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35/44

A shrinking surplus of metal in Latin America is the instrumental change


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36/44


37/44

Our industry intel suggests the region is entering a period of structural deficits

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38/44

REGIONAL FOCUS:

INDIA WONT BE ENOUGH EVEN FOR ITS DOMESTIC NEEDS*


39/44

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India will allegadelly be at the margin the third largest source of new output capacityin 11-15 (after China and ME)but will highely likely deliver less than promised

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40/44

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41/44

REGIONAL FOCUS:

MALAYSIA & INDONESIA TO PARTIALLY ALLEVIATE UNTIL 2015*


42/44

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Malaysia & Indonesia probably the next hot spotswould help to alleviate from 15 on

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43/44

Conclusions>

The global primary aluminum market is already in deficit in both China and ROW.

At the margin, the game changers are China (increasingly importing primary metal and scrap),The Americas (no greenfield expansions expected until 2016 while Brazil booms), and India (outputless than expected and widening internal needs).

Global competition for material will intensify in the next few years, with the GCC practically theonly region generating additional excess metal at the margin at least until 2015. Surplus in EastEurope, Africa and Oceania will remain the same in the next four years.

In consequence, our models suggest we should see rising premiums across the board with

special emphasis in The Americas, as they have the worst geographical position to attract metal.China and India should also see notably higher premiums given the expected size of its needs,although it has a much better position to access the metal from regions with potential surplus.

**

*

*

We can gladly share our premium forecasts, feel free to give us your business card!


44/44

4 expected shifts in regional aluminum market balances and the premium outlook jorge vázquez harbor...

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