Aluminium prices at multi-year high. Supply-demand dynamics, dollar continue to influence short-term outlook

Source: Reuters

Supply concerns and high demand pushed domestic aluminium prices to an all-time high recently. The government-induced output curbs scaled the most active SHFE rates to a 13-year peak, while the benchmark LME three-month futures rallied to their highest level since 2011 due to shrinking inventories.

On MCX, aluminium futures started the year close to Rs 160 a kg, gradually gained moving to a record high of Rs 215.20. In the last year, prices gained 47 percent in the domestic market. The trend was no different at the benchmark London futures and the key Shanghai futures. Prices in both markets gained 55 and 45 percent, respectively, in the last 12-month period.

The energy-sensitive metal got a boost in the domestic market due to reports of a shortage of coal at several power plants in the country.

India is the second-biggest producer of primary aluminium and shortages of coal raised concerns about a serious disruption of domestic output. The coalfired electricity and crude derivatives are the main sources of energy that account for almost half of the production cost of aluminium in the country.

Output cuts from China too reduced the global supplies and lifted prices higher. Various Chinese regional governments have been forcing high-energy-sensitive smelting companies to curb production for reducing emissions.

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So far this year, China has cut more than 2 million tonnes of production capacity of aluminium due to the regulators-imposed restrictions. China accounts for produces more than half of the world’s aluminium output. The country is the world’s largest producer and consumer of the metal. The smelting industry in the country used almost 7 percent of the power supply in the last year. This has prompted several regional governments to take measures to use electricity more carefully.

Recently, the Xinjiang region, the country’s smelting hub that accounts for one-fifth of the world's supply, imposed output limits on five smelters. The move was part of a larger effort to stamp out illegal production.

Shortage of domestic supply may increase China's net aluminium imports this year. It is expected that the country may import about 1.1 million tonnes, slightly higher than the previous year's bumper inflows of 1.05 million tonnes. Though China had little need for overseas aluminium in the past several years, the arbitrage opportunity between Shanghai and London prices makes imports favourable.

Worries over tight supply and growing demand for the metal in the areas of automobiles and packaging following a swift bounce back in the global economy are expected to support the metal.

China’s economic growth swiftly turned to the pre-pandemic levels in the first quarter of the year. Likewise, the US and other European countries also reported robust economic numbers, indicating a stable growth in factory and industry activities worldwide.

The supply-demand dynamics and the performance of the US currency continues to influence the short-term outlook of the commodity. Though China's economy rebounded, its businesses are grappling with higher cost and supply bottlenecks, thus are losing steam.

Extreme weather and a fresh outbreak of Covid-19 are likely to slow the Chinese economy more than expected in the coming months, which may weigh on the prices of the metal.

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