Dull market. Aluminium prices seen restrained until Q1 2023 on weak demand

Aluminium prices have increased to near three-month highs currently but they will be on a leash at least until the end of the first quarter in 2022 due to weak Chinese growth and global demand, analysts say. 

The metal’s three-month contracts on the London Metal Exchange (LME) are now ruling at $2,425  a tonne, while spot delivery rates are $2,410. Prices have increased nearly five per cent this week and nine per cent in the past month after China, the world’s largest consumer, eased coronavirus curbs. 

However, aluminium prices are down seven per cent year-on-year. According to the Trading Economics website, aluminium prices are down 40 per cent from the record high of $4,000 witnessed earlier this year soon after the Ukraine war broke out. 

Price forecast

Research agency Fitch Solutions Country Risk and Industry Research, on the other hand, has cut its price forecast for the silvery-white metal, used in cans, construction, aeroplanes and automobiles, for the fourth quarter of 2022 to $2,725 a tonne from $2,850. 

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Fitch Solutions said, “...in light of weaker-than-expected growth and demand led by the slowdown in Mainland China, an emerging recession in the Eurozone, and evidence of market oversupply based on stocks data.” It has further adjusted its 2023 price forecast lower to $2,600 from $2,700.

The research agency said the downside risks remain, exacerbated by a strong dollar, rising interest rates, and persistently high inflation. “Thus far, supply-side constraints have been overshadowed by weak demand. Potential losses of Russian supply linked to sanctions have not yet materialised, but are beginning to have an impact,” it said.

No LME ban on Russian supplies

Analysts said aluminium supplies are intact as the LME has decided not to ban trading in the metal produced in Russia or store it in its warehouses. This is because a substantial amount of players in the market still plan to buy Russian aluminium in 2023. 

Fitch Solutions said the investor sentiment across the metals complex also remains weak, leaving limited room for upwards swings in prices and China maintains enough production capacity to effectively offset most of the loss of all Russian exports in the years ahead limiting the price downside.

Fears of a demand-sapping global recession triggered by an aggressive tightening campaign from major central banks are affecting the sentiments, Trading Economics said. 

“Alcoa, the largest US aluminium producer, has warned investors that high energy and raw material costs and a fall in aluminium prices are putting pressure on margins,” the website said.

Operating capacity up

Shanghai Metal Market (SMM) news said aluminium operating capacity increased slightly last month in China, improving supplies. “By the beginning of November, the domestic operating aluminium capacity had recovered to around 40.48 million tonnes,” it said.

In addition, it said, the renewed pandemic post the week-long National holiday in October hindered the production of downstream enterprises in Henan and Shandong. The industry demand declined as a result. 

Fitch Solutions said it does not expect aluminium prices to collapse to pre-Covid levels but they will continue to be under pressure until the first quarter of next year in view of faltering Chinese demand due to its zero Covid policy and the absence of stimulus which can boost demand. 

Though prices are expected to remain elevated in the longer term, there are concerns over increasing demand for low-carbon aluminium and adoption of recycling the metal in a big way, Fitch Solutions said.  

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