Growing automotive demand boosts aluminium outlook

After a dismal performance last year, LME aluminium has turned the tables in 2016 gaining around 10 per cent in the first seven months. The metal touched highs of $1,688.5/tonne and is currently hovering around $1,640.

This can be largely attributed to the rising automotive demand as recently affirmed by Norsk Hydro, one of Europe’s largest producers. The aluminium giant insisted that a surplus of up to 1.5 million tonnes of the metal in China this year will be offset by a deficit elsewhere in the world and steady demand.

The company also raised its estimate of growth in global aluminium demand to between 4 and 5 per cent from 3-4 per cent. The main reason is a strong demand in the US and Europe spurred by carmakers that are increasingly using aluminium to build lighter cars in order to meet carbon emissions standards.

This can be seen by a massive 75 per cent surge in use of the metal in car bodies last year, led by the Ford F-150 pick-up truck. Sharp fall in the inventories has also been a blessing for the light metal.

As on August 5, stocks of aluminium held in Shanghai Futures Exchange warehouses are at 107,520 tonnes, the lowest since 2011. LME inventory situation is no different wherein stocks have fallen by 577,275 tonnes, or almost 20 per cent, so far this year.

Also, aluminium stocks in China’s five major markets — Shanghai, Wuxi, Hangzhou, Gongyi and Nanhai — continued falling after hitting their lowest in seven years. Talking about production, China produced 2.69 million tonnes (32.7 mt annualised output) of refined aluminium in June, down by 2.4 per cent year-on-year compared with 31.5 mt of annualised output in May.

From January to June 2016, China’s total refined aluminium output was 15.11 mt, virtually flat on the same period last year.

Since aluminium and oil prices share a good co-relation, a 13 per cent rise in NYMEX WTI crude oil prices this year on account of major supply cuts and disruptions in Venezuela, Canada and Nigeria boosted the metal.

On the contrary, the biggest US aluminium producer Alcoa has reduced its deficit forecast from excess of 1 mt to approximately 775,000 tonnes for the current year as it now expects a 5 per cent demand growth to outweigh 2.5 per cent supply growth instead of a smaller supply increase of 2 per cent.

However, Chinese economic growth, steady at 6.7 per cent in the second quarter, remains a cause of concern as it is widely believed to be a temporary relief post aggressive stimulus measures.

Also, this surprise uptrend in prices has boosted speculation that aluminium smelters in China would restart capacity, which it had closed down last year to support the falling metal.

As a result, some Japanese aluminium buyers have agreed to pay producers a premium of $90 per tonne for metal to be shipped in the July-September quarter — 22-23 per cent down from a $115-117 per tonne premium in the previous quarter.

Hence, we expect aluminium prices to trend higher from a two-month perspective and LME Aluminium (CMP: $1,656.5/tonne) prices can possibly trend higher towards $1,800-1,850/tonne while MCX Aluminium (CMP: ₹110.5/kg) prices may rise to ₹118-119/kg.

The writer is Associate Director — Commodities & Currencies Business, Equity Research & Advisory — Angel Broking. Views are personal.

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