During 1H14, the ex-China aluminium market tightened after seven years of surplus, following a long period of painful production cuts, largely by producers outside of China. This period of tightness and strong ex-China pricing proved short-lived following a ramp-up in Chinese semi-fabricated aluminium exports (underpinned by low-cost supply growth and weak domestic demand), which effectively filled the ex-China deficit. This, together with the bearish 3Ds of macro (Deleveraging, Deflation and Divergence), drove US and European ‘all-in’ aluminium prices down by a third over the past year, or c.$850/t, to trade around c.$1,720/t, their lowest level since the 2008/09 financial crisis, and prior to that since 2003.

After accounting for all the recent output cuts and curtailments, we still project c.2.5-3mt surpluses across 2016-19. With prices currently putting over 4mt of ex-China and over 6mt of Chinese production under pressure, 2.5-3mt of output cuts looks achievable on paper. However, our base case is that market balance will be difficult to achieve, considering:

a) most prior periods of substantial surplus have finished because of an exogenous and major pick-up in global demand, or have been protracted.

b) most of the ‘easy’ cuts ex-China have already been made over the past seven years.

c) Chinese producers are often subsidised by the government.

d) costs are deflating (currency and energy).

e) some marginal producers may have hedged at 2014 prices.

As a result, we forecast the longest period of weak marginal producer margins in a generation (two years). Our new 3-, 6-, and 12-mo forecasts are $1,500/t ($1,800/t), $1,500/t ($1,800/t), and $1,550/t ($1,900/t).