The ‘light metal’ seems to have gained weight in 2016. So far this year, aluminium prices have surged 10 per cent, which is second only to zinc.

The uptick is primarily due to the drop in output from China –– by 461 thousand tonnes per month between December 2015 and February 2016, according to data released by the International Aluminium Institute.

China produced 4,550 thousand tonnes of aluminium in just the first two months of the year, down 8 per cent from 4,956 thousand tonnes in the first two months of 2015.

Additionally, the China Nonferrous Metals Industry Association said that 4.27 million tonnes of aluminium-smelting capacity –– accounting for 12 per cent of China’s total capacity –– had been idled since production cuts were implemented in late December 2015. Production in January fell to 80,000 tonnes per day, the lowest daily output for China since October 2014.

And another 4.6 million tonnes of capacity was shut down as of mid-March. Aluminium stocks were estimated to be above 1 million tonnes prior to the cuts in December. By end-2015, they had fallen to 800,000 tonnes, before rebounding slightly to 870,000 tonnes at the end of March.

The trade trigger

Further, China’s General Administration of Customs said that exports rose in March for the first time in nine months. Exports were up 11.5 per cent year-over-year in March against a 25.4 per cent drop in February.

China’s imports fell 7.6 per cent in March, against a fall of 13.8 per cent in February.

In the January-to-March period, exports of primary aluminum, alloy and semi-finished aluminum products fell 11 per cent year-on-year to 1.08 million tonnes.

Aluminium prices received another boost from declining LME stocks: available metal now stands at 1.24 million tonnes.

An estimated 875,000 tonnes on warrants have been cancelled since mid-March.

In line with falling local inventories, Japan’s aluminium premiums for April-June shipments were set at $115-117 a tonne, up about 5-6 per cent from the previous quarter.

Besides, Rusal, the world’s second-largest producer, estimates global aluminum consumption to grow by 5.7 per cent to 59.5 million tonnes this year. It also expects Chinese growth to continue to be strong at 7 per cent year-on-year in 2016.

It further believes that 1 million tonnes of additional capacity outside China is at risk of being mothballed in the second half of this year if the current depressed prices are sustained.

Additionally, it expects closures to mount to 1 million tonnes in the nine months to June 30.

However, China Hongqiao Group Ltd, the world’s biggest aluminium producer, has announced that it will expand capacity by 16 per cent this year to about 6 million tonnes –– after the country’s aluminum production fell in the first two months as companies cut output to stem their losses.

All things considered, we expect aluminium prices to trend higher from a two-month perspective; LME Aluminium (CMP: $1,639.50) prices can possibly trend higher towards $1,720/tonne, while MCX Aluminium (CMP: ₹108.85) prices may surge to ₹112/kg, although rupee appreciation towards the 65-mark will restrict the upside.

The writer is Associate Director - Commodities & Currencies Business, Equity Research & Advisory - Angel Broking. Views are personal.

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