Excess supply to keep aluminium prices in check

Published: September 9, 2016 3:09:05 PM

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.

aluminium pricesAluminum 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. (Reuters)

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. Prices of the metal have recovered sharply from January’s low of $1449 to hit yearly high of $1709 in mid-August in the international markets. Apart from speculative buying across riskier assets and weakness in US dollar the metal has also risen seeking support from lower stocks at exchange warehouses.

Aluminium stocks at LME warehouses have declined almost 24 per cent year to date and at 2.2 million tonnes are at lowest level since December 2008. Meanwhile, those at SHFE are down 60 per cent year to date and at 117,000 are hovering near lowest level since September 2011.

The metal has tried to breach $1,680- $1,700 levels at least on three different occasions this year but each time the rally has failed to sustain. One major factor that can be attributed to this is structural oversupply. Even though demand for aluminum has been steady; ample availability of the metal has dented the upside.

Lack of major supply side response to weak prices and higher Chinese productions are expected to keep the market well supplied thus weighing on the prices. China had announced production cuts last year in response to weak prices however with prices rebounding this year many idle smelters have restarted production. The rise in production has led to jump in China’s aluminium exports thus adding to global glut. Recent report from China showed that aluminum exports rose more than 20 per cent in August from year earlier.

With production and thereby exports from China expected to remain robust in coming months we expect Aluminium prices to be subdued. The metal may trade broadly in the range of $1,520 – $1,700 in medium term with bias being negative.

(The author is Priyanka Jhaveri, senior research analyst at Kotak Commodity Services)

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