Aluminium on the rise, again

The ultimate result of the 2008 global financial crisis was the end of the multi-year long commodity super cycle in base metals. Since then, most of the ferrous and non-ferrous metals have been largely in the bearish territory on concerns over the slow pace of economic activity that reduced the demand of metals. Aluminium has been the worst-performing non-ferrous metal, though it is one of the prerequisites of industrialisation of a country. However, the recent price actions in the commodity reflect a recovery amid reports of strong economic activity from the major consuming countries, coupled with supply uncertainties.

During mid-2008, aluminium prices on the London Metal Exchange was around $3,375 a tonne but later they plummeted to $1,275 by March-end 2009, dropping over 65 per cent due to worries over global economic slowdown. Sentiments in the domestic bourses were also not different, but a weak currency provided some support.

Higher usage from industries such as automobile, construction, transportation, aviation and packaging sectors turned the physical market deficit. Automobile manufacturers are seen shifting to aluminium instead of steel to trim down the vehicle weight and thereby, reduce emissions in consequence of strict rules of the European Union and the US.

Low output from China and other producing nations together with a lag in getting the metal released from LME warehouses have also created tightness in physical market.

Increased surcharges and tightened LME rules for releasing materials from warehouses resulted in slowing down the delivery of the commodity. However, global demand exceeds supply with production of primary aluminium in the second quarter of 2014 pegged at 13.284 million tonnes (mt) against a demand of 13.753 mt.

Reportedly, China has de-commissioned several high-cost and polluting smelters with a production capacity of around two tonnes. Due to the scarcity of raw-material, Chinese imports of alumina, a material derived from bauxite to produce aluminium, increased significantly during the first half of the year. China had earlier increased its aluminium smelting capacity regardless of its mounting dependence on imported raw materials from other countries such as Indonesia and Australia. Besides China, Australia has permanently shut a 190,000-tonne smelter recently. Lower global prices and increased cost of power and labour urged many producers to reduce their production. However, supply-demand imbalances outside China alone are around one mt.

Earlier, an export ban of unprocessed mineral ores from Indonesia lifted prices. Worries over supply shortage resulted in a record high premium around $400/tonne in securing the commodity physically.

Buyers from Japan, one of the top consumers in Asia, quoted record prices for the metal as producers cut output and demand escalated. Positive global economic releases and renewed push into the infrastructure construction from China has made investors optimistic over the commodity. Smelters are refraining from adding capacity currently. Since $2,500 a tonne is required to incentivise the smelters, companies will not be in a hurry to restart the closed smelters. Also, the consensus is that the commodity will remain in deficit in the next year will lift the sentiments.

LME stocks have increased over the last couple of years. During mid-2008, LME warehouse stocks were around one mt but it had constantly increased testing a record 5.49 mt in early 2014. The sharp rises in inventories were due to feeble physical demand from China, world’s top consumer, and other developing nations. However, stockpiles have slumped over 15 per cent in the first half of the year to the lowest level seen since December 2011 on increased prospects of global economic recovery and concerns that the demand will outpace production.

The positive economic activity around the globe will support the commodity. Upbeat manufacturing data from the top consumer China and bullish economic activities from the US would be the trend setting factors for the commodity in the near future.

However the global benchmark, LME prices are unlikely to move past $2,500-2,600 a tonne in the immediate run due to a strong dollar whereas in the domestic market, feeble currency possibly obstructs major declines.

The writer is Senior Analyst/Research Head, Geojit Comtrade Ltd. Views are personal.