All is not well with the global economy. The US-China trade tiff and a slowdown in manufacturing across the West have pulled down demand for base metals, especially aluminium.

At the London Metal Exchange (LME), the spot price of aluminium was $1,775/tonne last Friday, down about five per cent from the levels a year ago.

The International Monetary Fund (IMF), in its January World Economic Outlook report, revised lower the global economic growth in 2020 and 2021 by 0.1 per cent and 0.2 per cent from its October estimates, to 3.3 per cent and 3.4 per cent, respectively.

In 2019, the global economy is likely to have grown by 2.9 per cent.

However, depending on the development in the US-China trade war, the global growth may even move lower.

Slower economic expansion would mean less industrial activity, resulting in subdued demand for base metals.

Sober demand

Since the auto industry is the largest consumer of aluminium, its slowdown across the globe has been a dampener for the metal. With reduced consumer-spending, uncertainty remains for the sector. Rating agency Moody’s has given a negative outlook for the global auto industry in 2020, as it expects light vehicle sales to decline by 0.9 per cent following a projected 3.8 per cent decline in 2019.

Demand in China, the single biggest consumer (little over 50 per cent of global consumption) as well as the top producer (around 56 per cent of global production) of the metal, can have a significant influence on the price of aluminium this year, if it improves.

Many Chinese companies are taking an effort to strike deals to build roads, ports and other infrastructure requirements in other countries. This may boost the demand for the metal going ahead. Further, as emerging markets including India, Thailand and Indonesia aim for more industrialisation, it can help aluminium from the demand side.

Sufficient supply

The global primary aluminium production in 2019 contracted for the first time in a decade despite the entry of Russian major Rusal’s aluminium in the market, as the US lifted sanctions on the company. According to the International Aluminium Institute (IAI), the production was down 1 per cent to 63.7 million tonnes. The last time the metal’s output contracted was in 2009, when it dropped 5.7 per cent. The major reason for the 2019 fall was China, which saw its production drop nearly 2 per cent to 35.8 million tonnes. Western Europe and Latin America, too, saw a dip in production in 2019. That said, the market continues to have excess supply.

Production in aluminium has been in excess of demand for three years now, by 3-4 million tonnes.

In 2019, while production was 63.69 million tonnes, demand was 60 million tonnes.

Thus, the outlook from the supply point is not very encouraging for aluminium investors.

Further, the issues faced by the Chinese smelters seem to be only temporary. Going forward, the supply from these units can be expected to be restored, which will only add to the already surplus production. Also, the output from countries in the Gulf Cooperation Council (GCC) has been steadily increasing. (Currently, GCC production stands at 9 per cent of the global output.)

Price outlook

Going ahead, in 2020, a strong price rally is doubtful, given the weak economic outlook for China as also the US and Europe.

One factor that gives comfort to aluminium investors now is a spike in the cancelled warrants on aluminium at the LME. When a warrant is cancelled, it means that the holder of the warrant, generally large traders, is not ready to make their stock available to the market.

Cancelled warrants on aluminium inventories started shooting up in the last week of December 2019. From 162,700 tonnes in end-November, it ballooned to 623,225 tonnes on January 22 (highest since 2016), and stood at 528,075 tonnes as of January 24. Cancelled warrants now account for 48 per cent of the total inventory at LME warehouses.

The highest ever was 56 per cent in 2014. The spike in cancelled warrants is now squeezing the supply available in the market — a positive signal for the price, for the short term. However, note that if the prices scale above $2,000/tonne, a fresh bout of supply may come into the market from closed smelters, keeping a check on the price.

Outlook for Indian market

In India, almost half the demand for aluminium is from the power sector, unlike other countries where it is the auto sector that drives the demand.

In India, the auto sector consumes about 15 per cent of the aluminium produced in the country. There is not much upside seen in the aluminium price in the domestic market, too.

Aluminium scrap imports come into India in bulk quantities. So, if the global excesses find a way to India this year again, with no custom barriers, the prices may move in tandem with the global market.

 

 

Related Topics
comment COMMENT NOW