Aluminium seen ruling firm in short-term on supply disruptions

After hitting a 10-year-peak, aluminium prices could rule high in the short-term on strong demand and supply concerns. This has led to analysts and rating firms raising the price outlook for the metal during the current half of the year.

Prices of aluminium — widely used in aerospace applications, packaging, automobiles and railroad cars and as a construction material — hit a decade-high of $2,720 a tonne on Wednesday. On Thursday, LME aluminium three-month contract ended at $2,705 a tonne, while for cash it was quoted at $2,694.

Main risk

In view of the surge in prices, some of the rating firms and analysts have raised the price outlook for the metal. Fitch Solutions Country Risk and Industry Research (FSCRIR) has revised its forecast for this year to $2,050 from its earlier $1,850. Dutch multinational investment bank’s research arm ING Think has maintained its forecast at $2,600 but projections for the year ha been put at $2,420. Credit Suisse has raised the price forecast to $2,670 from $1,900.

“The main risk in the market at the moment is rising supply disruptions which came in two-fold. The first one is a power crunch with some Chinese aluminium smelters being asked to slash operating rates, and now risks are rising in India with coal inventories running low,” said Wenyu Yao, Senior Commodities Strategist, ING Think.

The second reason for aluminium’s surge is tied to China’s long-term pursuit for decarbonisation due to which supply growth has been capped from some regions.

Combo effect

Last year, China, the world’s largest producer, accounted for 37.33 million tonnes (mt) of the global production of 65.29 mt. India, the second biggest producer, is estimated to have produced 3.55 mt of aluminium this year.

During April-June this year, global aluminium output was 16.65 mt compared with 16.06 mt in the same period a year ago. In July, the production was 5.7 mt against 5.4 mt in the year-ago period.

“The recent (aluminium) price rally has been driven by a combination of supply concerns and recovering global demand and the temporary mismatch between supply and demand. The acceleration in the global economic recovery and restocking trends across many markets are leading to robust manufacturing activity in China,” said FSCRIR in its note.

Yao said smelters in various Chinese provinces have been asked to cut power consumption or stagger their usage. As a result, smelters have had to lower their operating rate, resulting in lower production.

Extending Chinese curbs

“Monthly productions have been declining three-month in a row — in provinces including Inner Mongolia, Guangxi, Guizhou and Yunnan. However, there is a risk that another province, Qinghai, may also face the same problem as the local grid has issued a warning to smelters on potential power shortage,” she said.

The Chinese city of Baotou in Inner Mongolia had announced in March that it would curtail some aluminium smelting this year in order to comply with energy consumption targets. “However, we do not expect curtailments in Inner Mongolia to make a big impact on overall domestic production in 2021,” FSCRIR said.

The ING strategist said Qinghai had a collective capacity of around 2.8 mt and relies fully on the grid power supply instead of captive power. Another concern was that the Yunnan region would go through a dry season from this month. Last time, the dry season prolonged and low water storage in reservoirs affected power generation.

Indian coal supplies

Despite these developments, Fitch Solutions said Chinese aluminium production would increase two per cent this year as an additional production capacity of 3 mt is being added.

The other major push for the metal this week was Indian power utilities running short of coal. Earlier this week, the Centre asked power firms to import coal as power generation increased after the Covid-19 shutdown curbs were eased.

Power generation in India, second largest import of coal, increased 16.1 per cent in August compared with the same period a year ago, while month-on-month, it was up 2.1 per cent.

Coal powers over about 70 per cent of electricity generation in India. Reuters reported that these units increased their output by 23.7 per cent in August. This is the reason for the units to run short of coal stocks.

Credit Suisse said coal shortage had the potential to disrupt aluminium production in India.

Fitch Solutions said it was revising its aluminium prices forecast as the market is currently tight amidst supply concerns when demand for manufactured goods is recovering strongly.

Concerns to ease

“While prices will remain supported in the near-term, supply concerns will ease during the latter half of the year, as investor speculation wanes amid strong Chinese production,” it said.

China’s recent decision to relax curbs on aluminium scrap import will add to the supplies and thus ease some concerns.

ING Think’s Yao said dual control in China to cut carbon emissions could affect supply, while some new projects have failed to go on stream as scheduled.

Against expectations of three mt of production capacity being added, less than one mt has been realised, she said.

With the Chinese market in deficit, such disruptions add to wider deficits forcing Beijing to import aluminium and absorb any surplus, the strategist said.

Fitch Solutions said that it expects aluminium prices to “remain elevated in the coming years as its demand is supported by an accelerating shift to the green economy”.

However, increasing demand for low-carbon aluminium could present a future risk to the metal’s price, it said.

Yao said aluminium could face a bumpy road in the light of macro headwinds amid the US Fed’s policy to taper off easy money policy.

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