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COLUMN-Aluminium up on great expectations; reality lags behind: Andy Home

(Andy Home is a Reuters columnist. The opinions expressed are his own)

LONDON, April 24 (Reuters) - Aluminium has staged an impressive price rally since the start of the month.

On the London Metal Exchange (LME) three-month metal has powered up to $1,900 per tonne, a level last seen in October 2013.

That makes aluminium the third-best performer among the core LME-traded base metals, behind nickel and tin, both of which are trading off a bullish supply story in the form of Indonesia's ban on nickel ore and the same country's tightening grip on tin exports.

Aluminium is chasing its own bull narrative, one of accumulating production cutbacks pulling the global market into supply deficit after years of cumulative surplus.

That narrative has recently received some powerful boosts in the form of more cutback announcements by Western producers such as Alcoa and BHP Billiton and by Chinese aluminium giant Chalco <.

The problem, though, is one of timing.

At an individual smelter level, it takes time to wind down production prior to mothballing or closure, meaning a lag between statement of intent, price reaction and actual cutback.

At a global level, this is an industry still struggling to turn itself around due to the historic momentum of capacity growth in the Middle East Gulf and in parts of China.

It is a problem all too evident in the latest global production figures from the International Aluminium Institute (IAI).

Despite some 1.6 million tonnes of announced capacity closures since the start of 2013, global reported output still rose by 3.3 percent to 11.75 million tonnes in the first quarter of this year. That represents a slowdown from last year's growth of 4.3 percent, but only a marginal one.

Run-rates dropped in March itself but at an annualised 47.9 million tonnes they have increased by just over a million tonnes since December.

****************************************************** Graphic on global aluminium output in March 2014: http://link.reuters.com/suj78v

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CHINESE SUPERTANKER WILL TAKE TIME TO TURN

The growth momentum is still largely coming from China, where aluminium output rose by 10.2 percent in the first quarter.

There was a drop in run-rates in March itself, according to figures from the China Nonferrous Metals Industry Association.

But this conforms to an established statistical pattern at the start of any year, production apparently surging in February only to fall back in March.

Even allowing for that "normal" statistical quirk, annualised output in March of 23.4 million tonnes represented year-on-year growth of over 14 percent.

Which is not to say that Chinese smelters are faring any better than their Western counterparts. Indeed, Shanghai aluminium prices <0#SAF:> have lagged LME prices since the start of the year and many smelters are still struggling to stay afloat.

However, too few are giving up the fight, thanks in part to continued support from local governments, to compensate for the new generation of smelters ramping up in northwestern provinces such as Xinjiang.

The result is a chronically over-supplied Chinese market with stocks, both visible and off-market, rising and the price continuing to trade below the producer pain threshold.

Does Chalco's announcement it is suspending some 600,000 tonnes of annual smelter capacity change things?

Well, obviously, much depends on whether the promise translates into reality. It's fair to say the announcement has been greeted with a degree of scepticism, both in China and elsewhere. That's because it's still not clear whether a similar statement of intent last June, when it said it was cutting 380,000 tonnes of capacity, ever made much difference on the ground.

However, even if the cuts do materialise, and that may be a big "if", they will not in themselves turn the Chinese aluminium supertanker around.

The country's annualised production grew by just over 610,000 tonnes in the first three months of this year and more capacity is still being constructed. Analysts at AZ China consultancy assess the amount of capacity under construction with a 2014 completion date is around 3.7 million tonnes.

The dynamics of China's huge aluminium smelter sector are now widely understood and the LME price (but not the Shanghai price) is disregarding continued evidence of surplus in China on the basis that prohibitive export taxes prevent that surplus from impacting the rest of the world.

It's an assumption, mind you, that requires a collective blind eye to be turned to the flow of aluminium manufactured products out of the country.

MORE CUTBACKS BUT GULF SMELTERS POWER UP

Perhaps more surprising than the continued growth in China is the fact that aluminium production everywhere else is creeping higher again.

Annualised production grew by 438,000 tonnes over the first quarter of 2014 and March's ex-China run-rate of 24.5 million tonnes was the highest since August last year.

The impact of production cuts is clear to see in year-on-year comparisons in areas such as Eastern Europe, Latin America and North America (as shown in the chart above).

But the effect has been more than offset by a renewed growth spurt in the Gulf region, where EMAL is firing up a new pot line at its Abu Dhabi smelter and the new Ma'aden smelter in Saudi Arabia is ramping up.

Gulf production rose by almost 14 percent in the first quarter, while annualised production of 4.5 million tonnes in March represented year-on-year growth of almost 18 percent.

True, some of the announced cuts are yet to take place, such as Alcoa's closure of the Point Henry smelter in Australia (due to be completed in August) and of 147,000 tonnes of capacity in Brazil (due in the second quarter).

There is also the increasing probability of BHP Billiton closing permanently its Bayside plant in South Africa. What the company calls "a formal stakeholder consultation" is taking place with a view to closure in the second half of this year. But the 180,000-tonne per year plant has been operating at only half that capacity anyway for several years.

As in China, it is clear that turning the smelting supertanker around is going to take time.

GREAT EXPECTATIONS

None of which is obvious from the $200-per tonne rally staged by LME aluminium over the last month or so.

It is in the very nature of commodity markets that they trade on expectations about the future.

It's just possible that the world outside of China is approaching a state of aluminium supply deficit, although the lack of independent statistical analysis in this market makes it very hard to say with any conviction.

LME stocks are not going to provide any clues, clouded as they are by the mass movement of metal to off-market storage for financing.

Which leaves production rates as the firmest statistical yardstick by which to measure any shift of fundamental dynamic.

And right now, production is growing.

In China it never stopped. It's the renewed rise in output in the rest of the world that should give aluminium bulls pause for thought.

This is a market with great expectations. Reality may struggle to meet those expectations.

(Editing by Keiron Henderson)

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