- The aluminium market is unlikely to see enough producer cutbacks to reduce oversupply in coming months as currency benefits and cheaper inputs have allowed most smelters to stay out of the red.
That means the price of the lightweight metal used in transport and packaging may be drawn still lower towards levels that would force more supply to be shut down, analysts and industry sources said.
Closures or lower output are needed to slash a surplus on global markets mainly due to surging output and exports from top producer China. Consultancy CRU has increased its forecast of a global aluminium surplus for 2015 to 963,000 tonnes.
"Cutbacks are going to be difficult. Input costs have come down, so margins at producers may in fact have stayed OK even 2though prices have come down," said Robin Bhar, head of metals research at SocieteGenerale in London.
The so-called "all-in" aluminium price - the cash aluminium price on the London Metal Exchange plus the surcharge or premium for immediate delivery - has tumbled 28 percent over the past seven months to about $1,830 a tonne.
But costs have also slid, partly due to weaker local currencies against the dollar in top aluminium producers such as Russia, Norway and Canada, keeping many operations profitable.
With the price of raw material alumina also down, overall costs to make aluminium have sunk by about $400, bringing down marginal costs to about $1,600 a tonne, Bhar said.
Marginal costs - the 90th percentile of the cost curve - are regarded as the level that prompt curtailments to production when prices drop below them.
SURGING CHINA OUTPUT
Production has continued to surge in China, partly due to lower costs for alumina and power, climbing 22 percent year-on-year in May to a record high of 2.67 million tonnes.
"China is still building out lots of new smelting capacity, which is another factor in reducing the Chinese cost floor. All of the smelters they're building are state of the art, highly energy efficient," said analyst David Wilson at Citi in London.
Outside of China, Russia's Rusal and U.S. Alcoa have said in recent months they were considering further shutdowns.
Top producer Rusal said in April it might idle 200,000 tonnes of capacity while Alcoa said the month before it was reviewing 500,000 tonnes of smelting capacity.
Decisions on whether to trim output, however, would not be easy after millions of tonnes have already been shut in recent years.
"Cutbacks are much more difficult now. Most of the obvious candidates have already been shut down by the big producers," said Marco Georgiou at CRU. "If we have to go into a new round of cutbacks, it will be more painful this time."