Global aluminium production is contracting this year, according to the International Aluminium Institute (IAI). Cumulative output in the first eight months of 2019 slid by 0.6% to 42.5 million tonnes with production down in both China, the world’s dominant producer, and the rest of the world, it said.

If the trend continues, this will be the first year since 2009 to see a simultaneous production decline in both halves of the aluminium universe.

Visible inventory, meanwhile, has fallen to multi-year lows. Total stocks registered with the London Metal Exchange (LME) last week slipped below 900,000 tonnes for the first time since 2008, while Shanghai Futures Exchange stocks are at two-year lows.

None of which has done much for the aluminium price. LME three-month metal has this morning touched $1,713.50 per tonne, its lowest since January 2017.

The problem is that the aluminium market doesn’t believe that falling production and stocks are anything other than fleeting trends.

The collective focus is now on the problem of demand weakness.

Production outside of China was down by 0.45% in the January-August period.

Signs of rising output in both North America and Russia, thanks to the restart of the Becancour smelter in Canada and the ramp-up of the Boguchansk plant in Siberia, are currently being offset by production weakness in Latin America and Western Europe, down by 13% and 7% respectively.

The real supply-side story, however, has been playing out in China.

Chinese production has fallen by 0.75% so far this year, a highly subdued performance from a country that was expanding aluminium output at a double-digit pace as recently as 2017.

Although weak margins have played a role in constraining production growth, national run-rates have taken two unexpected hits.

China Hongqiao Group, the world’s biggest aluminium producer, last month slashed its 2019 production guidance by up to 300,000 tonnes, or almost 5%, to reflect the impact of flooding from Typhoon Lekima on some of its operations in Shandong province. The consensus is that other producers have also been affected.

Xinfa Group, another top producer, has closed 500,000-tonnes of annual capacity after an explosion at a plant in the northwestern Chinese region of Xinjiang.

Commodity research company CRU expects China’s production to slide by 0.5% over the course of 2019.

However, next year looks very different, CRU forecasting production to rise by 5% as the current supply hits fade and new capacity comes on line.

Neither CRU nor other analysts are expecting any significant impact from the coming winter heating season restrictions on heavy industry.

Although the expected recovery in production next year is moderate by the standards of the Chinese aluminium sector, the real worry is now about the state of demand, both in China and everywhere else.

Aluminium has enjoyed many years of high demand growth relative to most other industrial metals but this year usage has been hit hard by the downturn in the global automotive sector, which accounts for around 30-40% of all demand for the light metal.

CRU is expecting demand outside of China to contract by 1.1%, the first year of negative growth since the global financial crisis.

“The extent of the weakness is staggering,” say analysts at JP Morgan. They are pencilling in a 3.5% contraction in North American demand this year, partly reflecting greater usage of scrap by product manufacturers.

Growth in China itself is expected to brake sharply from 4% in 2018 to just 1.6% this year, according to CRU. Here also automotive weakness is the main culprit, but sluggish demand from the property and power grid sectors is in the mix as well.

That means the domestic market is likely to move into significant supply surplus in 2020. And, if history is anything to go by, that means more exports of Chinese semi-fabricated aluminium products, which is how Chinese surplus normally manifests itself.

Chinese export growth has slowed this year to just 4% in the first eight months from 24% in calendar 2018.

The aluminium market is betting that without an improvement in demand the export gates will reopen next year, unleashing more product in a western market that is already suffering from negative demand.

You can start to see why current low visible stocks are not preventing the price slide. This is partly a problem of optics.

Reuters