LONDON, Aug 29 (Reuters): For the world's hard-pressed aluminium producers the current outlook is the rosiest in many years.
Russian giant UC Rusal, for example, has just returned to profit for the first time in five consecutive quarters.
That's largely thanks to the combination of a robust London Metal Exchange price, currently trading around $2,100 per tonne, its highest level since early 2013, and historically elevated physical premiums.
The price recovery is being underpinned by a tectonic shift in underlying market dynamics. After years of structural surplus, the global aluminium market finally appears to be turning to supply deficit on the back of accumulating capacity closures.
Rusal, which reported an 11-per cent drop in production in the first half of this year after its own curtailments, is forecasting a 1.5-million tonne global deficit in 2014.
That may be at the high end of the spectrum of forecasts but it no longer sounds like a producer pipe-dream. In the most recent Reuters poll of analysts four out of 14 submitting a market balance assessment for this year forecast deficit, the number rising to almost half for 2015.
The main threat to this new market optimism comes from China. Production there is still rising. More disconcertingly, so too is the stream of semi-manufactured products leaving the country.
In the world outside China aluminium production has been trending lower for a couple of years.
Annualised production in July was 24.38 million tonnes, down by over 1.5 million tonnes from the record high of 25.92 million tonnes in October 2011.
It's been a painfully slow grind lower with closures of higher-cost capacity partly offset by new start-ups, particularly in the Gulf region. And it is continuing, U.S. producer Alcoa announced earlier this week the permanent closure of its already-mothballed Porto Vesme smelter in Italy.
Over the same near three-year period Chinese production has grown by 5.7 million tonnes annualised to 23.28 million tonnes in July, according to figures from the China Nonferrous Metals Industry Association.
Not that Chinese smelters have enjoyed better margins than anyone else. But local governments and, at times, central government has subsidised losses, mostly in the form of tweaking power rates, a key determinant of an aluminium smelter's bottom line.
Even where Chinese smelters have been forced out of business, their places have been more than filled by a new generation of lower-cost smelters in northwestern provinces such as Xinjiang.
But China, to quote a phrase coined by Klaus Kleinfeld, chairman and chief executive officer of Alcoa, exists in a different aluminium universe, one that has little bearing on what happens in the rest of the world.
And to a certain extent, that is true.
Certainly, when it comes to primary aluminium, what China produces largely stays in China.
And it has done ever since the country's authorities increased the tax on exports to 15 per cent back in 2006.
