Supply surplus may spoil the party for aluminium

By Kaynat Chainwala

Aluminium topped the chart of non-agri commodities in 2017, chiefly because of illegal capacity closure and proposed winter shutdown in China last year to fight air pollution.

The rally could not spill over to 2018 though. The light metal was hit by concerns that the Chinese winter output curbs in 28 northern cities are way below the expected 30 per cent.

These fears are not unfounded, given that China’s aluminum production jumped to a five-month high in December 2017, pushing overall 2017 output to a record 32.27 million tonnes. The sudden surge in capacity can be attributed to new smelting facilities coming on stream that were not required to cut capacity under the pollution crackdown, namely Inner Mongolia by Aluminum Corp of China (Chinalco) and the southern province of Guangxi.

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The result: Aluminium moved from the best performer in 2017 to the worst so far this year as prices plunged by 11 per cent on the LME and 9 per cent on the MCX in the first quarter of 2018.

Not just this, supply looks abundant, going by inventories at both LME and Shanghai warehouses. Shanghai stocks now stand at a record high of 970,000 tonnes while LME inventories, although lower on a y-o-y basis, have surged by 14 per cent this year to 1.25 million tonnes.

On the contrary, demand is unable to catch up with supply, as is seen in import figures. Latest data from China’s General Administration of Customs showed that primary aluminium imports plunged 47 per cent in February 2018 to 3,641 tonnes while the numbers came down by as much as 70 per cent in January and February.

The blessing in disguise is the ongoing tariff drama between the US and its major trading partners. Trade tension caught global investors off-guard after the US formally imposed tariffs on steel and aluminum imports in March. Fears intensified after China retaliated with reciprocal tariffs on $ 3 billion of imports from the US, from steel to pork.

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Things went from bad to worse after Trump threatened another $ 100 billion tariffs on Chinese products although this could not help prices much as they languished near eight-month lows.

The much-needed relief for aluminium came only after the US, in its most aggressive action against Russia for its alleged involvement in the 2016 US elections, imposed sanctions against 24 Russians, mostly allies of President Vladimir Putin. The list includes billionaire aluminum tycoon Oleg Deripaska and his company Rusal, which controls around 7 per cent of total global aluminium output. This pushed up aluminium prices to $ 2,144 per tonne on the LME and Rs 139.3 a kg on the MCX, the highest since March 6.

Aluminium prices are trading near one-month highs, boosted by supply disruption concerns caused by the tariff cacophony and the same is reflected in US premiums. However, we expect record high inventories and robust Chinese supplies to take over soon and hence advise a sell in aluminium from the Rs 142 mark towards Rs 130 in the near term. (CMP: Rs 138.65 per kg).

(Kaynat Chainwala is Research Analyst- Base Metals at Angel Broking. Views expressed in this column are her own and do not represent those of ETMarkets.com. Investors should consult their financial advisers before taking any investment calls based on this article)