Demand for primary aluminium is expected to improve in 2010 but the magnitude of the increase is uncertain. The market surplus in the world outside China experienced in 2009 is expected to continue in 2010 but at a somewhat lower level depending on developments in demand and the strength of economic developments in general. China is expected to produce a slight surplus of metal in 2010.
Demand for metal products improved slightly in the second half of 2009. However, the consumption of metal products in both Europe and North America remains significantly below the levels experienced in 2007 and 2008 and there are no apparent indications of a strong recovery to pre-crisis consumption levels.
Demand in the flat rolled products market in Europe improved toward the end of 2009 and we expect market demand to grow in the first quarter of 2010 and continue growing moderately into the second quarter.
The overall outlook for the European and US extrusion markets continues to be weak, but demand is expected to stabilize across most markets during the first quarter of 2010 with construction being the most challenging market segment.
In China, demand for primary aluminium grew strongly throughout 2009. Correspondingly, production increased and most of the previous curtailed capacity has been restarted. With additional new capacity coming on stream, production in China reached an all time high of around 16.5 million mt in the fourth quarter on an annual basis versus 11.3 million tonnes on an annual basis in Q1 2009. China imported 1.4 million mt of primary aluminium in 2009, but only limited volumes in the fourth quarter. Prices between the LME and SHFE are expected to converge and no significant imports of primary metal are expected in 2010.
The Chinese authorities have discouraged the export of energy in the form of primary aluminium through the imposition of export duties. As a result, the market balance for primary aluminium in China is not expected to have a significant impact on primary metal markets outside of China.
As result of the substantial consolidation of upstream aluminium activities during the past two decades, relatively few companies are producing a substantial portion of primary metal on a global basis. Most companies are targeting integration into both energy and bauxite activities, while the focus on downstream integration appears to be lower. Over the last decade, the downstream aluminium industry has evolved significantly, with consolidation as well as spin-offs from large integrated aluminium companies. Today, there are only two major global integrated aluminium companies - Alcoa and Hydro. Industry analysts expect that the restructuring activity will continue as major metals and mining companies seek to reduce their exposure to downstream operations. A shift in capacity build-up toward emerging, fast-growing markets is also expected.
Aluminium price developments
Aluminium prices exhibited an historic decline during the first quarter of 2009 as the turmoil in the financial markets spread into the general economy. Prices remained weak but improved continuously the rest of the year.
In the period from 2003-2008, there was a strong upward shift in the cost curve for primary aluminium production, triggered mainly by a significant increase in prices of energy and natural resources. The significant drop in demand for aluminium resulted in declining demand for raw materials and falling smelter input costs. Commodity prices in general fell as a result of the economic downturn. Consequently, the cost of producing aluminium declined and the industry cost curve ended up lower in 2009 than the previous year. Prices for energy and natural resources have apparently stabilized and started to recover during 2009. This is expected to result in higher costs going forward.
In the long run, prices generally reflect market fundamentals of the physical market as well as underlying cost developments. Trading by financial investors in the derivative markets can have a significant influence on price developments in the short and medium term. Price volatility, therefore, has been and may continue to be high.
Production moving to energy-rich areas
In the future, primary aluminium production is expected to be developed in energy-rich areas where power prices are more competitive than market prices in developed energy markets such as Europe and the US. Such countries and regions are expected to include the Middle East, India, Iceland and some countries in Africa, Asia and South America. China will also continue to be an important producer and consumer of primary metal.