However, in recent weeks deficits have emerged, as seen in sliding inventories of aluminium used in the transport, construction and packaging industries. In warehouses monitored by the Shanghai Futures Exchanges, aluminium stocks at 274,347 tonnes have dropped 12% over the last month. In LME approved warehouses, stocks have fallen 5% since mid-February.
Chinese production should rise, but at a slower pace than previously forecast due to power rationing and disruptions in provinces such as Yunnan where aluminium is mostly smelted using hydro electricity. "China's smelters remain under pressure because of hydro power shortages. At the same time, demand should pick up, so exports will likely remain capped," said Bank of America analyst Michael Widmer. "We expect rising deficits going forward." Widmer expects an aluminium market deficit of 1.53 million tonnes this year and a shortage of 1.93 million tonnes next.
Meanwhile, in Europe lower power prices have helped to reduce production costs, but smelter restarts are limited. A scramble for supplies has since mid-January fuelled a 20% jump in the duty-paid aluminium premiums buyers in Europe pay in the physical market - above the LME price - to $330 a tonne.
"Physical premiums managed to hold up in Europe where supply constraints remain following the large smelter cuts last year and Russian metal being diverted to Asia," Macquarie analysts said in a note.
"Given more Russian metal is expected to flow to China, there should be fundamental support for physical premiums." Macquarie forecasts an aluminium market deficit of 670,000 tonnes this year and global consumption at 70.8 million tonnes. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Aluminium market balances Physical aluminium premiums in Europe Aluminium inventories Aluminium price ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Pratima Desai Editing by Mark Potter)
