Commodity Analysis

Aluminium to be range-bound

Satya Sontanam | Updated on May 27, 2018 Published on May 27, 2018

The protectionist economic policies of the US could trigger an over supply

The movement of the spot aluminium prices on the London Metal Exchange (LME) have been robust in the past one year, recording a growth of about 16 per cent year-to-date. However, volatility has also been high, triggered by the US’ imposition of tariffs on aluminium import and sanctions on Russian aluminium giant Rusal, which contributes nearly 6 per cent to the global production of the metal.

Aluminium prices rallied beyond $2,600 per tonne, a multi-year high, after the imposition of sanctions on Rusal, but slipped back to $2,200-levels in less than a week after the US moved to ease the effect of the sanctions.

The metal now quotes at nearly $2,254 per tonne on LME.

Going forward, with uncertainties looming around the corner with respect to the US sanctions, slow shut down of smelter capacities in China and recent rise in inventory levels, average monthly aluminium prices are expected to be range-bound between $2,100 and $2,400 in the next six months.

However, the long-term picture is positive as the demand for the metal is expected to be promising with the increasing use of aluminium and its alloys (substituting steel) in the automobile sectors in the US, Europe and China; rising use of aluminium wiring instead of copper in the power sector; and the advancement of e-vehicles which are expected to consume more aluminium than conventional vehicles.

Threat of over supply

Since China accounts for more than 50 per cent of the global aluminium output, any addition of smelter capacities, or any ramp-up or shut-down of plants in the country will have a direct bearing on the aluminium prices.

The metal’s LME price has been moving up, factoring in the supply deficit that would be created due to shut-down of illegal capacities and production cuts in China, to alleviate the environmental impact; but this may no longer hold prices up. Many producers are already reluctant to shut down plants, and are restarting closed smelters to make the most of the current favourable conditions in the sector.

In fact, there was no impact on net capacity and production in China in 2017, despite a few production cuts, as there were new capacity additions, too.

Also, the protectionist economic policies of the US, which has posed tariffs and other barriers for US companies to trade with other nations, could trigger an over supply of the metal globally. The US’ imposition of 10 per cent tariff on aluminium imports will result in the opening up of closed smelters in the US, and shut down other aluminium producers’ opportunity to export the commodity to the US. This will create a excess supply in those countries. The tariff imposition — which has been delayed for Canada, the EU and Mexico — will come into effect on June 1. China’s counter attack by imposing additional 25 per cent duty on aluminium scarp imports from the US will add fuel to the fire.

However, the sanction on Russia’s Rusal, if implemented, is expected to reduce the supply of aluminium in the global market by about two million tonnes.

But this news doesn’t turn the tide in favour of aluminium as it has been already priced in by the market.

According to the International Institute of Aluminium, global aluminium production was nearly 63 million tonnes in 2017, an increase of about 5.8 per cent over the previous year. It is expected to reach 70 million tonnes by 2020 — an annualised growth of 3.4 per cent.

Demand matched supply during the year as China was surplus by two million tonnes and the rest of the world was in deficit by the same quantity.

Going forward, the world’s aluminium demand is expected to grow at a rate of around 4 per cent. The US and Europe are expected to generate robust demand, majorly driven by transport and construction sectors.

However, what’s worrying analysts is the recent rise in inventories of the metal at LME, which could cause pressure on the aluminium prices.

India in line with LME

There is a positive correlation between LME aluminium prices and domestic aluminium prices as they move in tandem with the landed prices of aluminium as determined by LME. So users of aluminium, including automobile makers and construction companies, may not see a significant increase in input cost as seen in 2017.

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