What s changed? The main changes since the March 2017 LTO centres on an upward revision to global demand growth and lower short term growth in Chinese smelter output. These adjustments further reduces our projections for global market balance. We now expect the market to be in a balanced position over the next few years with a move to a slight deficit in 2019. However it should be noted that the market still continues to carry a high level of inventory over the medium term. Our global demand growth estimate for 2017 has been revised up to 5% versus 4.8% previously. 2018 growth is also slightly higher than the Q1 LTO. Higher demand growth in the world ex China is the main driver for our upward adjustment to short term demand expansion. Better than expected offtake in Europe Asia ex China and Latin America more than offsets slightly weaker growth in North America We maintain our China primary aluminium demand growth for 2017 at 7.3% with growth decelerating to 5.7% by 2019. Our forecast for China s long term trend growth is slightly lower at 1.9% over the 2016 2035 period compared with 2% previously. Between 2017 2035 we project the market to add 24.7 Mt of additional primary metal demand. China s conflicting signals on primary metal output suggests some uncertainty for the near term supply outlook. A clampdown on unauthorised smelters and the possibility of future environmental related restrictions in output continues to be met with a still healthy pipeline of new projects and still firm reported output growth. High LME prices are either incentivising potential restarts and/or keeping high cost smelters in operation. The above translates to a global market surplus of just around 400 kt in 2017 followed by 220 kt in 2018 and a nominal deficit of 200 kt in 2019. In short the market is now much tighter than our Q1 LTO projection. Moving forward the risk is that if China fully executes planned output restrictions the global balance could well move into a larger deficit position than we are currently showing. Since the start of 2017 LME prices have continued to build upward momentum on China cutbacks and better than expected demand conditions. We expect this generally positive tone to be maintained over the remainder of 2017 with prices expected to average $1867/t for the year up $263/t on the 2016 annual average. Prices are finding good support currently at levels around $1850/t supported by value buying . The still high level of global inventories will cap any significant push in prices above $2000/t on an annual average basis for the next few years. We now expect the annual average price to hit $2000/t in 2020 two years earlier than in our previous LTO report. We maintain our long run incentive price for alumina at $360/t and aluminium at $2000/t. Despite the cross currents of smelter news emerging from China since the start of 2017 the thrust of our forecast has remained relatively unchanged. China is expected to add capacity and increase year on year production over the foreseeable term. Output is forecast to increase from 32.5 Mt in 2016 to 42 Mt in 2021. World ex China output is forecast to increase from 26.8 Mt in 2016 to 31.6 Mt in 2021 up 18% on the back of strong growth mainly in India and the Middle East. Output is relatively steady at all time highs in 2017 (74.4 ktpd) but is expected to move higher near term as Vedanta fully commissions the 1.25 Mt/a Jharsuguda II smelter. Beyond 2018 Aluminium Bahrain's Line 6 expansion will add about 500 ktpa capacity. At current aluminium prices the pressure to curtail output has been diminished. Global aluminium output is set for a period of modest near term synchronised growth. Alumina output curtailments coupled with a surge in Chinese demand (restocking and rising metal output) had the desired effect in May arresting the long global price decline since January. Prices turned sharply upward and currently reside around RMB2631/t (US$386/t) in China domestic market and US$305/t in Australia or 16.4% of the LME aluminium cash price up from US$272/t or 14.4% in May. The prospect of smelter curtailments in China is weighing on the alumina market and making buyers suddenly more cautious. Alumina prices are not expected to reach the recent highs seen in December/January due to a supply overhang in China while a similar situation is seen ahead in the World ex China region. We have raised our outlook for China's import requirement of bauxite following confirmation that two new refineries are advancing towards starting late this decade or early 2020s. This sees our prediction for China's import requirement rise a modest 10 Mt from the 75 Mt to 85 Mt. Demand update We project global primary long run demand growth at 2% p.a. unchanged from our previous LTO. China s share of global demand is expected to fall from 53% in 2016 to 52% by 2035 demand growth there will increasingly be driven by greater use of secondary metal. We also expect lower shares for mature markets such as North America and Europe over the forecast period. In contrast Asia ex China will see its share of the global demand pie rise from 13% in 2016 to 16% driven my newly emerging markets and rising intensity of use. For 2017 we expect global demand to increase by 5% (4.8% previously) and to remain above 4% over the next three years. Transportation construction and consumers durables will be the main drivers on a sectoral basis. Prospects for demand growth in Europe have surprised on the upside over the past 6 months. Uncertainty over political events in the region have dissipated with (for now) the trend towards rising populism being kept in check. The return to some semblance of political normality has triggered greater business and investor confidence and feeding through to better than expected offtake. We estimate European demand to grow by 2.1% versus 1.7% previously driven by the automotive and construction sectors as well by greater confidence in pipeline restocking. We expect this momentum to be maintained through 2018 with growth reaching 1.9% (1.7% previously). In contrast our 2017 outlook for North American growth has been trimmed from 1.7% to 1.3%. Political uncertainty surrounding the Trump administration has dented investor confidence coupled with question marks over the much promised spending plans for infrastructure. Nevertheless we do expect demand growth to show some resilience further out driven in particular by the automotive sector. Between 2016 2021 we project growth at 1.7% p.a. We have adjusted up our 2017 demand growth prospects in Asia ex China from 3.1% to 3.5%. Much of this is driven by an upward revision to Indian demand. The main risk to the region comes from rising protectionism which could slow demand growth in the region given its dependence on global trade. Though this should be tempered to some extent by rising internally generated economic growth and aluminium demand especially in end use sectors such as construction power and consumer durables. By end use we maintain a positive outlook for the transportation power and consumer durables sector. Aluminium continues to make gains against steel across a range of applications in the transportation sector driven by greater weight reduction opportunities and recyclability. It is not just demand from the automotive sector that will benefit but also in trucks buses and mass transit systems. In power distribution aluminium continues to gain market share at the expense of copper in the high voltage sector particular in developing economies where there is room for a build out of basic infrastructure. Demand will also benefit from the growth in consumer durables particularly in the computer and mobile technology sector. Longer term we expect the metal to be under threat from new materials such as composites plastics and ceramics across a range of end use applications. Here we expect aluminium to be a complimentary metal used in conjunction with other materials. Supply update Global smelter output is estimated at 62.5 Mt in 2017 up 5.4%. World ex China comprises 27.6 Mt up 3%. China is estimated to contribute 34.9 Mt up 7% from 2016. China s aluminium output prospects have been swayed by strong cross currents so far in 2017. Efforts to curb pollution in key regions around Beijing resulted in a plan to limit smelter production in the major production zones of Shandong and Shanxi provinces. Ramped up environmental inspections and stricter enforcement of rules against unauthorised project construction also threaten capacity and production growth. At the same time the drumbeat of producer plans to add capacity projects marches on. Producers have increased capacity addition plans to about 5Mtpa in 2017 of which 2 Mtpa is scheduled for completion through Q2 2017. Monthly output appears set to trend higher after being relatively flat since Q4 2016 (91.5 ktpd) through the first five months of 2017 (91.3 ktpd / 33.3 Mt/a). However the authorities have announced a new round of inspections in Xinjiang and Shandong provinces which could result in additional cuts. Hence uncertainty in the market environment due to new expectations of added cuts. We are maintaining (for now) our original estimate of 2017 output at 34.9 Mt up 7% given that we earlier anticipated some cuts and the possibility of some capacity completions that may be mothballed. Further out we project Shandong Xinjiang and Inner Mongolia to contribute most of China s total output increase (9.6 Mtpa) by 2021. Most notable is Weiqiao's plans to raise output from 5.8 Mt to 9.6 Mt by 2021. World ex China output is forecast to increase from 26.8 Mt in 2016 to 31.6 Mt in 2021 up 16% on the back of strong growth mainly in India and the Middle East. Output is relatively steady at all time highs in 2017 (74.4 ktpd) but is expected to move higher near term as Vedanta commissions three 312 ktpa lines of the Jharsuguda II smelter while it evaluates the start up date of the fourth line. Beyond 2018 Aluminium Bahrain's Line 6 expansion will add 500 ktpa to output growth. At current LME/SHFE prices the pressure to curtail output has been diminished. Global aluminium output is set for a period of modest near term synchronised growth. Global aluminium prices will provide support for new output and re starts through 2017 and into 2018. Better than expected metal demand in China will also provide the incentive for output gains over the next few years. We estimate that global alumina output will reach 128.5 Mt in 2017 up 6.1% from the year ago level. World ex China production is seen at 61.5 Mt up 3.8% while China output is pegged at 67 Mt up 8.3%. World ex China 2017 output growth is supported by startup of the 1 Mtpa Ketapang refinery in Indonesia and the 600 ktpa NhanCo refinery in Vietnam as well as restart of the 1.65 Mtpa Alpart refinery in Jamaica. The seaborne bauxite market is heading towards oversupply as new projects chiefly in Guinea more than meet China s growing demand. We see no need for new capacity from highly probable and probable projects until the early 2020s. Supply demand balances update We now expect a significantly reduced global surplus over the next two years with 2019 likely to show a nominally deficit market. If China follows through with proposed output cuts and curbs on new capacity the market could easily tip into a more significant deficit in 2018 and 2019. We anticipate a market surplus of around 400 kt this year followed by an essentially balanced market in 2018 and 2019. Despite the positive fundamental tone global inventories still remain at elevated levels with stocks in terms of days of consumption at 85 days in 2017 and falling to 78 days in 2020. Our long term average is 70 days. Against the background of better fundamentals and the possibility that China output cuts could tip the market into a more defined deficit LME prices have continued to build upward momentum over the past 6 months. A weaker US dollar has also helped to keep prices elevated. We now expect the LME cash price to average $1867/t in 2017 rising to $1916/t by 2020. However with prices trading at well above the $1800/t level the incentive to re start idled capacity or even to reactivate previously idled plans for new capacity additions may be too tempting. Either in China or outside there are no shortages of projects that could be activated. Alumina output curtailments coupled with a surge in Chinese demand (restocking and rising metal output) had the desired effect in May arresting the long global price decline since January. Equally predictable however was that the sharp upturn in the average China domestic price from about RMB2273/t (US$329/t) to RMB2655/t (US$391/t) in June resulted in higher alumina capacity utilization and softening prices. That and the prospect of added smelter curtailments is weighing on the alumina market and making buyers suddenly more cautious. Of course the China market sentiment feeds directly into the Australian spot alumina market where the price has also slipped modestly in recent days to about US$305/t or 16.4% of the LME aluminium cash price up from US$272/t or 14.4% in May. For the remainder of 2017 and 2018 much will depend on re start of the 1.65 Mtpa Alpart refinery under new Chinese ownership. World ex China is SGA balanced in H2 2017 and a smooth resumption of output has the potential to switch the market back into surplus by mid 2018. Likewise the 2 Mt/a Al Taweelah refinery in Abu Dhabi is expected to begin commercial production in Q3 2018 adding downward pressure to SGA prices if the start up goes well. The World ex China market could be in a 2 3 Mt surplus by 2019. Matching China s import requirement against potential supply sees Wood Mackenzie s value adjusted real 2017/t marginal supplier price to China fall from the high US$40s per tonne of bauxite to around $43/t in the longer term. The price is independent of cost and freight inflation factors. We have redesigned our Q2 and Q4 long term reports in response to client feedback. The new slidepack format will better highlight key developments and changes in the market. The new style slidepacks come attached with all the usual Excel data files and provide a more accessible summary of the changes from our main reports in Q1 and Q3 outlining the key points you need to know. The slidepack and datafiles are available in the downloads section. We hope you enjoy the new format and welcome any feedback you have.