Commodity Call: Aluminium regains mojo

Aluminium prices surged 4 per cent last week, with the spot price on the London Metal Exchange (LME) closing on a stronger note at $1,562 per tonne on Friday. This is just above an important resistance at $1,560. The metal is up about 10 per cent from its low of $1,423 made in November 2015. Between May and November 2015, aluminium spot prices had plummeted over 27 per cent from a high of $1,959.

On the domestic front, the aluminium futures contract traded on the Multi Commodity Exchange (MCX) rose 5 per cent last week to close at ₹107.65 per kg. This contract moves in tandem with the LME spot price. A weakening rupee, against the dollar, is providing additional support to the domestic futures contract.

Prices of most metals have been strengthening in the global markets due to the recent weakness in the US dollar. Dollar weakness usually boosts metal demand as it makes it cheaper for consuming countries to import. Aluminium had fallen through last year, due to China adding to the supply glut at a time when the global economy was struggling to grow.

Fundamentally, over the long term, one major factor that still offers hope for aluminium prices to revive is the expected increase in demand from the automobile sector. Reports suggest that in order to make vehicles more fuel-efficient, a key requirement is lower vehicle weight. Using aluminium helps in lightening up vehicles. With the global shift towards fuel conservation, the demand for aluminium from automakers could thus increase.

While the above factor will kick in over the long term, at the moment the market is still pressured due to the oversupply situation. For 2016, aluminium supply is also expected to increase by 3.2 million tonnes, which is a 5 per cent rise from 2015. So, the possibility of the metal reversing lower again cannot be ruled out. However, on the charts, there is no immediate and serious threat that suggests a sharp reversal in the price.

The LME spot price made a low of $1,423 per tonne and has bounced higher from there. On the charts, the price action is suggesting the formation of a base by prices consolidating between $1,400 and $1,550. This consolidation is also happening above an important long-term trendline support which is poised around $1,450.

Last week, as the spot price closed just above an important resistance, if it sustains above this level, a further rise to $1,600 and $1,620 is possible. A further break above $1,620 will pave the way for the rally to extend to $1,680 and $1,700 over the medium term. But a reversal from $1,620 can trigger a corrective fall to $1,560 or even lower.

On the downside, $1,450-$1,400 is the significant support zone. The metal will come under renewed pressure only if it declines below $1,400. The next target will be $1,350. On the domestic front, the MCX-Aluminium contract has risen 11 per cent since November last year. The downtrend that had begun from the November 2014 high (₹130.15) halted at a low of ₹93 in October last year. This is also a long-term trend support. The 21-week moving average at ₹100 and ₹97.5 are the important supports for the contract. The outlook will remain positive as long as the contract trades above these levels. Resistances are at ₹110 to ₹111 — the 50 per cent Fibonacci retracement level. A strong break above this can take the contract higher to ₹115 and ₹117. The outlook will turn negative only if the contract declines below ₹97 decisively. Such a fall will increase the danger of it falling to ₹93-₹92.

The sharp 2 per cent rally on Friday has taken the MCX-Aluminium contract above a near-term resistance of ₹106. However, the uptrend that had begun in November last year is approaching an important short-term resistance between ₹110 and ₹111. This resistance is likely to be tested now.

Whether the contract breaks above ₹111, or reverses lower, will decide the next leg of move. A strong break above ₹111 can take it higher to ₹113. But a reversal will increase the possibility of a corrective fall to ₹106 and ₹104 in the short term.

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