Aluminum Shortage? Don't Count on it in the Near Term

Like many commodities, aluminum had a tough time in 2015, and has continued to struggle in 2016 on the back of a large surplus. And unfortunately, those hoping an aluminum shortage will soon emerge will likely be disappointed. 
That’s largely because China continues to produce a lot of aluminum, despite the current surplus. Indeed, the Asian nation produced 32,000 MT of the metal in 2015 (significantly more than Russia, the world’s second-largest producer), and while it’s said it plans to reduce its output, at the moment it’s uncertain whether that will actually happen.
As Reuters’ Andy Home points out in an article published earlier this week, “[t]he exact state of Chinese aluminum production is uncertain, with February figures from the China Nonferrous Metals Industry Association (CNIA) pending.” He adds that while run rates appear to have fallen “significantly” in December and January, “the market has been caught out before by volatility in the data over the end-year period.”
What’s interesting about China’s high aluminum production is that the country didn’t always produce so much of the metal. As Forbes contributor William Pentland states in his own article, back in 2000 China produced only about 11 percent of the world’s primary aluminum; now it’s responsible for more than half.

So what happened? According to Pentland, that major increase was caused by “government policies rather than process improvements or lower input costs.” Essentially, the Chinese government began subsidizing high-cost aluminum smelters with “direct grants, interest free loans and other ‘incentive’ mechanisms.” Because of those subsidies, the smelters have been able to stay in business even in the face of falling aluminum prices.
Of course, one result is that smelters elsewhere in the world have had to close their doors. In particular, states Home, the US and Brazil have started producing less aluminum. The US Geological Survey corroborates that information in its most recent report on aluminum, noting that the US relied increasingly on imported aluminum in 2015 “as primary production and exports decreased.”
However, while excessive Chinese aluminum production is a major component of the current aluminum surplus, China isn’t the only country producing more aluminum than it should.
Home states that aluminum output in Asian countries outside of China gained 23.6 percent in 2015, and is “running at a fast 18.3 percent so far this year.” The commissioning of new smelters in India is driving those gains, and with full ramp up still to come for at least one of those smelters (Vedanta’s (LSE:VED) Jharsuguda II plant), the country’s aluminum output is only expected to increase.
All in all, the consensus seems to be that while production may be set to decline in China this year, no aluminum shortage is on the horizon. Even if it does cut production, China will still produce huge amounts of the metal, and it’s clear that while some other countries are cutting output, not all are doing so.

That said, there is a little hope for those hoping for some relief in the aluminum surplus. Many news outlets have been reporting that the US aluminum industry is calling for the government to take a stand against the subsidies China has put in place for its aluminum producers. This recent Wall Street Journal article details the situation.
It will certainly be interesting to watch what happens moving forward.
This is an updated version of an article first published on Aluminum Investing News on May 14, 2010. 
 
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 
Related reading: 
Aluminum Outlook 2016: Weakness to Prevail on Oversupplied Steel Industry