Aluminium gleams on reduced supply

The global aluminium market (excluding China) has entered into a deficit after eight long years of oversupply



Aluminium prices have shot up by over 7 per cent in the last three weeks. This follows the London High Court ruling that has halted the London Metal Exchange’s (LME) plans to speed up delivery of the metal from warehouses. The new warehouse rule was to be effective April 1.

It was expected that the move would cut logjams and see premium on the metal fade.

Aluminium prices are, however, likely to remain higher this year as there is an imbalance in demand-supply.

The global aluminium market (excluding China) has entered into a deficit after eight long years of oversupply. According to Russian company Rusal PLC, the world’s largest aluminium producer, there was a deficit of 570,000 tonnes in 2013.

A prolonged oversupply situation that had forced the global player to cut down production is cited to be the major reason for the market moving from surplus to deficit. The company expects the deficit to widen to 1.4 million tonnes in 2014.

Demand is expected to be 6 per cent higher, driven by an increase in consumption in aerospace and auto sectors. Increase in demand, coupled with widening deficit, could limit any fall in aluminium price and push it further higher this year.

Domestic scenario

India is one of the top producers of aluminium in the world.

The entire domestic demand is met from production within the country. The year 2013 was not a great one for the Indian aluminium sector because of reduced demand from sectors such as automobile, construction and power.

According to the World Bureau of Metal Statistics, aluminium production and consumption in India dropped 8.3 per cent and 8.8 per cent, respectively, in 2013. Indian aluminium price moves in tandem with the global price. As such, any fluctuation in the global price, coupled with the movement in the Indian rupee, will have an impact on the local price.

Outlook

Long-term view: The long-term outlook is bullish for the MCX aluminium futures contract (₹111 per kg). The contract dipped below its long-term trend-line support at ₹103 last month.

However, a sharp reversal has been seen after the contract recorded a low of ₹101.4 in March, thereby, keeping the uptrend intact. Key long-term support is at ₹100.5. While above ₹100.5, a rally to ₹135 is possible in the long term. Intermediate resistance for the contract is at ₹124, a breach of which will see the rally resuming.

The outlook will turn bearish only if the contract falls below ₹100.5. The subsequent targets will be ₹96 and ₹88.

Medium-term view: The strong rally in the last three weeks has turned the medium-term outlook also bullish. Significant medium-term support is at ₹103. A rally to ₹124 looks likely in the medium term. However, if the contract falls below ₹103, then the bullish outlook could be negated. In such a scenario, the contract could dip to ₹101-100.5 and then may begin a fresh leg of up-move targeting ₹124.

Short-term view: The short-term trend for the MCX aluminium futures contract is up. Within this uptrend the contract has seen a small corrective fall last week. The contract has decisively broken its 200-day moving average, currently at ₹110 which is providing good support now.

The contract can rise to ₹115.7 and ₹119, which are the 50 per cent and 61.8 per cent Fibonacci retracement levels, respectively. The short-term outlook will turn negative only if the contract declines below the 200-day moving average level. The ensuing target then will be ₹105.

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