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Aluminum 2016 Outlook: Will Supply Discipline Return?

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Aluminum 2016 outlook

Aluminum prices in the LME (London Metals Exchange) have been in a falling trend since September 2014. The LME 3-month aluminum contract fell more than 31% after hitting $2,105 per metric ton in September 2014. The downward momentum in aluminum prices continued in 2015 and is now extending into 2016 as well. Now, the question would be whether aluminum prices have bottomed out or if there’s more pain left. Let’s look at the key factors that would drive aluminum’s price movements in 2016.

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Industry outlook

Aluminum’s 2016 outlook would depend on the prevailing demand and supply situation. In Alcoa’s 4Q15 earnings conference call, the company said that it expects global aluminum and alumina markets to move into a deficit this year. Commodity (DBC) markets are said to be in a deficit when demand exceeds production. Alcoa expects global alumina demand to exceed production by 2.8 million metric tons in 2016. In aluminum, Alcoa is forecasting a global deficit of 1.2 million metric tons for 2016.

Aluminum markets have been in a surplus for almost a decade now. In the last couple of years, rising Chinese aluminum exports moved the markets into a surplus despite production cuts by other aluminum producers including Norsk Hydro (NHYDY), Century Aluminum (CENX), and Rio Tinto (RIO).

Demand

Alcoa (AA) expects global aluminum demand to rise 6% year-over-year (or YoY) in 2016, including an 8% YoY growth in Chinese aluminum demand. It’s important to note that there has never been much concern over aluminum demand as most of the aluminum end users—including packaging and transportation—have been growing at decent rates. Even the most pessimistic estimates would put aluminum demand growth at 5%.

However, the aluminum industry has been plagued by a massive oversupply that has put pressure on prices. In the next part of the series, we’ll explore how aluminum’s supply could shape up in 2016.

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