Aluminium jumps 9% in Jan-Aug; investors should maintain long positions

After a dismissal performance last year, Aluminum managed to gain around 9 percent in the first eight months.

Aluminum is considered one of the least volatile commodities in base metals pack. The metal after noting almost 19 per cent slide in 2015 has been fairly stable this year and is up nearly 5 per cent on a year-to-date basis.

After a dismissal performance last year, Aluminum managed to gain around 9 percent in the first eight months. The increase in demand is attributed by two factors, demand in China and demand from automobile industry. Sharp fall in inventories has also been blessing for aluminum.

If we look at inventories in Shanghai Future Exchange it is lowest since 2011 and in London Metal Exchange (LME), the inventories is down nearly 18 per cent. This is because last year to support the falling prices, many aluminum smelters in China were closed down. According to metal bulletin, from January to June 2016, China’s total refined aluminum output was 15.11 million tonnes, virtually flat on the same period last year. With production restarts continuing and new capacity being added, refined aluminium production is expected to continue accelerating into the second half of 2016. This may put pressure on the prices of aluminum. Norsk Hydro, one of Europe’s largest producers, insists that a surplus of up to 1.5 m tonnes of aluminium in China this year will be offset by a deficit elsewhere in the world and steady demand.

China is also dumping aluminum into India (which is seeing uptick in demand) at cheaper prices. This is because their government is giving subsidies on power and logistic. Norsk expects a 13 per cent growth in demand from the car industry to average 13 per cent a year until 2023. Aluminum use in auto industry in gaining traction in India, US and Europe. This is because aluminum is increasingly being used to build light cars in order to meet carbon emissions standards. The demand for aluminum is increasing in India from auto industry. Many Indian auto companies are exploring possibilities to develop light weight, energy efficient cars.

In MCX, aluminum has created rising wedge pattern. Its next resistance comes at Rs 113 and looking at the current rally, it seems aluminum will try to test the resistance of Rs 113-Rs 114 per kg. Aluminum is one of the metals this year that failed to rally despite other base metals like zinc, lead and nickel rallying more than 30 – 40 per cent. Some amount of buying is expected as investors may catch up with this base metal. If Aluminum closes above Rs 114, it may further rally till Rs 118. Now its support is at Rs 108. Our recommendation is to maintain long position in Aluminum with stop loss of Rs 108. Breaking below Rs 108, Aluminum may tumble till Rs 103. It needs to break above the resistance zone of Rs 113-Rs 114 to trigger further buying.

(The author is director, Tradebulls)

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