London 16/03/2016 - An aluminium price above $1,500 increases the potential for restarts of idled production, Macquarie warned.
Weak prices have resulted in a spate of production closures, with more than three million tonnes per year of capacity estimated to have been taken offline in recent months, the bank said in a report on Wednesday.
Indeed, global primary aluminium production in January fell to 4.726 million tonnes from 4.777 million tonnes in December 2015, the International Aluminium Institute (IAI) said last month.
But prices have recovered from their lows - three-month LME aluminium recently traded at $1,513 per tonne, a drop of $7 on Tuesday's close but up from its year-to-date lows of $1,449 in January. That was also its cheapest since 2008.
"Almost 90 percent of global capacity is currently making money on a mark-to-market basis. Moreover, at least part of the recent alumina price recovery we would put down to smelters looking to restock ahead of aluminium production ramp-up," Macquarie said.
The market also remains oversupplied - while Chinese inventories have been trending lower, global stocks remain at record levels of more than 15 million tonnes.
As well, the shift from LME to off-market warehouses only adds to the opaqueness because it disguises the potential availability of units on the market, Macquarie said.
Amid cheaper rent deals and tightening warehouse regulations, LME inventories have fallen to 2.8 million tonnes from more than 5.4 million tonnes in 2014.
The current backdrop of an increasing price and a decreasing cost-curve has meant that the overwhelming majority of producers are making money.
"Rather than further cuts, we foresee a strong temptation for production to restart at current idled assets - most notably in China. History has shown Chinese producers to be very reactive to price and any mirage of cartel discipline quickly disappears when there is money to be made," it said.
From a supply-demand perspective, the bank expects a roughly balanced market this year but only if the currently idled Chinese capacity remains off line.
"LME aluminium prices should remain at a level which keeps capacity idled - in our view around $1,400 for the foreseeable future," it added.
(Editing by Mark Shaw)