A good case is developing for being selectively bullish on base metals but aluminium is not one of them. That should just about sum up what’s in store for the aluminium market in 2017.

From a 6,00,000 tonnes deficit in 2016, the market is set to move to a surplus in 2017, with production set for a ramp-up. China which has close to 50 per cent share in both production and consumption, dominates the 57-58 million-tonne aluminium market. The main driver was the stagnant growth in Chinese output while demand grew by 6 per cent. However, consumers did not face any issues in securing the volumes they required.

The current year will be different. The split between the Chinese and the rest-of-the-world market balances will continue to be significant. “We expect to see China register a surplus of 2.7 million tonnes while the rest of the world will see a deficit of 1.9 million tonnes in 2017,” asserts an analyst.

The return to surplus is going to be facilitated by additional production. An additional four million tonnes of Chinese capacity is said to be coming on line. About half-a-million-tonne smelter restarts are also on the cards.

Obviously, this will put pressure on prices. While the metal recorded a 12 per cent price gain in 2016 over the previous year, in the current year it will struggle to hold on to the gain, unless demand turns more helpful. The stock and capacity overhang will make the $1,800-a-tonne price level hard to sustain.

In the last quarter of 2016, investors recognised the pull of tighter fundamentals and a Chinese economy responding to stimulus. No wonder, the market shifted to a clear upward bias. Now, the big question is whether the momentum seen in Q4 will carry into this year. Clearly, the key risk remains supply. New output has been supplemented by the use of aluminium stocks already in the supply chain, along with the use of secondary material and the use of semi-fabricated material exported from China.

“Chinese smelter capacity additions and restarts could see output grow 9 per cent this year after 1.4 per cent in 2016,” the analyst pointed out. But it is not China alone contributing to higher supplies. Indian smelter output is set to show strong growth in 2017. Most of the growth is coming from greenfield smelters, not just in India but in Russia too on the back of higher prices in the latter part of 2016.

Just as supplies are set to improve robustly, global aluminium usage is set to improve only modestly at a shade less than 4 per cent. Global stocks are set to rise to 7.3 million tonnes in 2017 after falling to 6.5 million tonnes in 2016. For all these reasons, aluminium is expected to lag well behind copper, lead and zinc in 2017.

The metal is likely to average $1,820 a tonne in 2017 with the possibility of a 5 per cent movement either side.

The author is a commodity market specialist

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