Demand for primary aluminium in the world outside China is expected to grow by about 7 percent in 2011, after a 19 percent increase in 2010. The market surplus in the rest of the world outside China is expected to be at a manageable level in 2011. We expect the Chinese primary aluminium market to remain in balance for 2011.
LME stocks fell gradually from 4.6 million mt in the first quarter of 2010 to 4.3 million mt during the fourth quarter of 2010. However, there are indications of an increase in unreported stocks during the year. Much of the metal continues to be owned by financial investors.
Demand for metal products in Europe and North America remained strong during 2010, following a healthy recovery at the beginning of the year.
Consumption in Europe of flat-rolled products increased substantially in 2010, compared with the previous year, driven by higher end-use demand and customer restocking. We expect a healthy demand to continue into the first half of 2011.
Demand for extruded aluminium products was substantially higher last year than in the previous year. Demand was higher for all geographical locations, except for Southern Europe. Overall market demand is expected to grow at the lower rates experienced in the second half of 2010 in Europe and the U.S., with building and construction being the most challenging market segment. The outlook within automotive and transport is more positive.
Demand in China continued to grow in 2010 following the rapid recovery of demand in the previous year, the increase was around 21 percent. Measures to reduce energy consumption in China moderated both demand and production in the second half of 2010. Demand for primary aluminium is expected grow by around 10% in 2011 and we expect that China will be balanced in primary aluminium.
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. In general, it seems that most companies are targeting integration into both energy and bauxite, while the focus on downstream integration appears to be lower. Today, there are only two major global integrated aluminium companies - Alcoa and Hydro - but both have also restructured their downstream portfolios significantly during the last several years.
Industry analysts expect the restructuring to continue as the major metals and mining companies seek to reduce their exposure to downstream operations, focus on upstream activities and streamline their metal portfolios, thereby targeting specific markets and seeking benefits by increasing the scale of their core operations. This led to the opportunity for Hydro to acquire the aluminium operations of Vale. A shift in capacity build-up toward emerging, fast-growing markets is also expected.
Hydro's aim for the medium term has been to maintain the present size of its aluminium smelting operations, which corresponds to about half of the upstream capacity of the four largest producers. At the same time, an important strategy has been to secure access to raw materials for existing production and, in addition, enable future expansions of electrolysis capacity.
Aluminium price developments
In the 2003-2008 period, 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 described above 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 increased again in 2010, resulting in a new increase of the cost curve.
Trading by financial investors in the derivative markets, as experienced in 2009 and 2010, can have a significant influence on price developments in the short and medium term, occasionally in contradiction with developments in the physical market. Price volatility, therefore, has been high the last several years and may continue. 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 volatile but improved continuously throughout 2010.
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 U.S. 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.