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Aluminium prices have gained over three per cent in the past two sessions on the London Metal Exchange (LME) after shedding nearly 35 per cent from the record high of $4,073.50 a tonne on March 4 this year.
ING Think, the financial and economic analysis wing of Dutch multinational financial services firm ING, said the metal has gained primarily after stocks dropped to a record low of 2.6 lakh tonnes.
Chinese officials announcing the gradual reopening of regions such as Shanghai from the Covid lockdown has also spurred the metal higher.
Russia sanctions
On Monday, three-month contracts for aluminium ended at $2,842 from $2,742 on May 12, while spot rates were quoted at $2,791 a tonne. Prices of the metal zoomed following sanctions on Russia and security issues at the Black Sea.
The white metal, used in a variety of industries starting from cans and kitchen utensils to automotive to aeroplane parts, had been rising since the beginning of the Chinese economic recovery from Covid-19 in the second half of 2020. Last year’s severe power crunch in China further boosted aluminium as smelters curbed production.
The drop in LME “on warrant” stocks to a record low reflected a tightness in the non-Chinese market, ING Think said.
Zero-Covid strategy
US research agency Fitch Solutions Country Risk and Industrial Research (FSCRIR), a Fitch unit, said aluminium, which had rallied smartly in the first quarter this year following the Russia-Ukraine conflict and concerns over supplies, had dropped to pre-conflict levels in view of the Chinese Covid lockdowns and weakening demand.
China’s zero-Covid strategy and resulting strict lockdowns severely impacted aluminium supply chains, first causing uncertainty around supply from lockdowns in producing regions, and subsequently impacting demand from end-use sectors countrywide that are impacted by lockdowns, Fitch said.
Fitch Solutions said it forecasts aluminium prices to average at $3,000 a tonne this year as the market is expected to stabilise in the second half of the year. Prices are expected to drop further and average at $2,800 next year.
Chinese supply exceeds demand
ING Think said Chinese supply growth has begun to exceed demand. It pointed to China’s latest data showing primary aluminium production rising to 3.36 million tonnes in April, up a tad 0.3 per cent year-on-year. But demand has been soft due to Covid lockdowns in China.
The Dutch multinational firm’s financial and economic analysis wing said aluminium production had recovered faster than expected. It also pointed out the data showing Chinese exports of primary aluminium and aluminium products at 5.97 lakh tonnes, outstripping 1.97 lakh tonnes of imports.
“China’s primary aluminium production has recovered from the lows seen in the second half of last year after being hit by a double whammy of dual-control measures and a power crunch,” ING Think said.
Fitch Solutions said it continues to see downside risks to its 4.5 per cent Chinese growth forecast for this year but it expects Chinese demand to “eventually pick up” in the second half. It would help prices to stabilise.
Fiscal policies to continue
The Chinese lockdowns restricted supply. With China being the world’s largest producer of aluminium, it would eventually drive prices to a balance in the coming months.
“Additionally, we continue to expect Chinese authorities to maintain loose fiscal and monetary policies throughout the year in 2022, in order to stimulate economic activity and growth, which should help to boost demand for aluminium,” Fitch Solutions said.
The US research agency said the aluminium market was sensitive to any supply issue outside of China, given the historically low stocks of the metal. LME stocks on warrant have fallen to 3.75 lakh tonnes in May, a 21-year low.
Growing market tightness
“Any disruption to supply could cause stocks to fall lower still, especially with demand set to pick up. This growing market tightness will mean that supply issues, or anticipated supply issues (from an escalation in Russian sanctions for instance), will have an outsized impact on prices,” it said.
Shanghai Metal Market News said as more Chinese units resume production after the pandemic, aluminium prices have gained to over 20,000 yuan ($2,960) a tonne.
Analysts said with Shanghai set to return to normal life from June 1, aluminium could gain on hopes of demand growth.
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