Lastyear's 546,000-tonne global aluminum market surplus will switch to a deficit of1.2 million tonnes in 2016, amid rising demand for the metal, lower prices thatdeter capacity restarts and high levels of capacity closures, including in China,according to a market report released May 10 by the Russian Aluminum Association.

Aluminumdemand from key industrial sectors is set to increase, but the key factor this yearwill be the Chinese government's program to balance metals markets by closing loss-makingfactories, according to the report.

"Weexpect the deficit, which appeared on the market last year as a result of reductionin production capacity, will double in 2016," said Ian Materov, chairman ofthe association and one of the report's authors.

In thereport, Materov noted that although no major capacity shutdowns had yet been observedin China, production in the country in February fell compared to the same monthlast year by 0.6%. In fact, according to the report, this shortfall in output wasthe biggest slide in three years.

He alsonoted that exports of so-called "fake semis" from the country slippedat the start of the year. Semi-finished aluminum exports in February totaled 258,000tonnes, or about 16.4% fewer than in January, and 36.3% less than in February 2015.

Westernaluminum makers last year blamed the "fake semis" exports for the sharpfall in aluminum prices. China's exports of the product, which attract a refundon producers' VAT payments on export, surged last year. Market pundits began labelingthe exports "fake semis" because much of the production exported was onlyminimally processed in order to qualify for the VAT refund by Chinese customs.

But theassociation's forecast is more bullish on the sector than some Western aluminumproducers.

is expecting a 2016global surplus in the metal of up to 1 million tonnes, while U.S.-based competitorAlcoa Inc. forecast a2016 deficit in the metal of approximately 1.1 million tonnes.

In atelephone conference call with analysts following the release of the company's first-quarter2016 earnings April 11, William Oplinger, executive vice president and CFO of Alcoa,said about 3.4 million tonnes of new or restarting Chinese capacity would offsetthe closure of 2.4 million tonnes of loss-making capacity during the year.

Despitethis, he noted that aluminum prices and premiums have already started to stabilizeand inventories of the metal have begun to fall.

In Russia,Materov said worldwide demand for the metal from the transport industry would increase5% compared to the 2015 level. Demand from the construction sector is set to increaseby 3% this year, and the electronics sector by 4% in the same period.

Beijing'sefforts to stem overproduction started in the aluminum industry in January thisyear, and could result in significant cuts to Chinese output and exports, he said.He predicted a positive year especially for domestic Russian producers, includingUnited Co. RUSAL Plc.

But theassociation's estimates assume that Chinese production being shut down won't berestarted. About half of global aluminum production capacity is based in the Asiannation, and some market pundits have questioned whether the Chinese reduction incapacity will last.

JorgeVazquez, managing director at consulting firm Harbor Aluminum Intelligence, anticipatesa production glut of 667,000 tonnes in 2016, while Paul Adkins, managing directorof AZ China, believed closed Chinese capacity could reopen at a "drop of ahat," according to Bloomberg News.

RUSAL,which shut down about 600,000 tonnes of capacity in 2013 and 2014 and had been consideringshutting down more until the start of 2016, has also expressed concern that Chinesesmelters could re-open.

DeputyCEO Oleg Mukhamedshin told an industry conference in China on May 10 that Chineseproducers must maintain discipline, according to a report by Reuters.

Closedsmelters there should remain shut to "ensure gradual improvement in pricesand profitability," he was quoted as saying.

Producersin the country aimed to cut 4.6 million tonnes of capacity per annum, but may havein fact re-opened capacity as prices pushed higher.

The priceof the metal surged on news of Chinese closures at the start of 2016, to a peakof US$1,669.75 per tonne at the end of April, but then fell back to US$1,536 pertonne by May 10, according to data from SNL Metals & Mining.