Aluminium prices, which had tumbled to a six-year low last month, are getting a breather from the possibility of production cuts in China.

Spot aluminium prices on the London Metal Exchange (LME) fell to a low of $1,475 per tonne on August 24, a six-year low. In the domestic market, the aluminium futures contract traded on the Multi Commodity Exchange (MCX) fell to ₹99.45 per kg on the same day. The MCX futures contract moves in tandem with the LME spot price.

Concerns of weak demand and global slowdown, especially in China, the largest consumer of the metal, dragged the prices lower. But news of production cuts has helped the metal’s prices recover.

According to the China Nonferrous Metals Industry Association, the country is expected to cut output approximately by 2.4 million tonnes in the coming months. China accounts for more than half of the world’s aluminium output. Reports also suggest that three major aluminium producers from the US would cut production by 1.09 million tonnes, which is about 65 per cent of the total output from the US.

The sharp 9.5 per cent rise in the spot price from the August low has eased the downside pressure for the metal. On the charts, there is a strong likelihood of the price extending its rise in the coming weeks.

Medium-term view The reversal in the LME spot aluminium price from $1,475 has happened from an important long-term support. Currently, the price is at $1,615. The price action on the chart suggests strength in the recent rally. Immediate support is at $1,565 and there is no immediate danger of any further fall in the price as long as it trades above this level. A rise to $1,700 looks likely in the coming weeks. A further break above $1,700 will open the doors for the next target of $1,800.

The bullish outlook will get negated if the price falls below $1,565. This will increase the chances of revisiting $1,500. A break below $1,500 can drag the price lower to $1,480 and $1,465 thereafter.

On the domestic front, the MCX Aluminium futures contract is currently at ₹106.55 per kg. It has been trading in a broad sideways range between ₹100 and ₹130 since 2011. Within this range, the contract recorded a high of ₹1,125.6 in May this year and fell to test the lower end of the range last month. The contract then formed a base around ₹100 by consolidating in a narrow range of ₹100 and ₹103 for about four weeks.

The strong breakout above ₹103 in the first week and the sharp 5 per cent rally in the last three weeks have reduced the threat of the contract falling below ₹100. The recent price reversal suggests that the broad ₹100-130 sideways range remains intact. A rise to ₹118 and ₹120 looks likely in the coming weeks over the medium term. A strong break above ₹120 can take the contract further higher to ₹130.

The outlook will turn bearish only if the contract records a break and a decisive weekly close below the psychological support level of ₹100. Such a break will open the doors for a fresh fall to ₹95 and ₹90.

Short-term view The strong gap-up opening on August 31 has turned the short-term outlook bullish for the contract. It eased the downside pressure and came as a big relief for the strong downtrend that was in place since May. The 21-day moving average at ₹105 is a key support for the contract. While the contract remains above this support, a rise to test the 200-day moving average resistance at ₹111 is possible in the coming days.

A further break above this hurdle can take it higher to ₹115 and ₹116 in the short term.

The contract will come under pressure if it declines below the 21-day moving average support. Such a fall can drag the contract lower to ₹103 in the short term.

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