Aluminium demand declined drastically since many countries imposed national wide lockdown to prevent the spread of the virus.
The outbreak of COVID-19 has adversely hit the global economic activities and the demand of industrial metals. Many non-ferrous metals which are widely used for industrial applications are currently placed at their multi-year lows.
Aluminium plunged to a four-year low in the key London Metal Exchange recently. The commodity has been under pressure since mid-2018 when US and China began setting tariffs and other trade barriers on each other. In addition, a sharp drop in demand due to the negative economic effect of coronavirus and hopes of a massive supply glut contributed to the fall in prices.
Aluminium demand declined drastically since many countries imposed nationwide lockdowns to prevent the spread of the virus. A sharp plunge in industrial activity especially in the areas like automobile sector adversely hit the metal.
However, despite a huge decline in demand, refiners continued to keep output levels steady due to a fall in input costs. Almost 40 percent of the cost of production is accounted for by electricity, which is cheaply available due to low oil prices.
Growing supplies coupled with weak demand is likely to leave the markets with a huge surplus. As per studies, the market surplus will continue for the current year and next. The increased stocks are currently reflected in warehouses monitored by London and Shanghai exchanges.
China is the world’s leading consumer and producer of the commodity. As per the International Aluminium Institute, China accounts for almost 55 percent of the metal produced globally.
The recent massive selloffs in the metal lead Chinese aluminium prices to four-year lows but have since recovered swiftly. China’s domestic prices outpaced other international markets by gaining more than 10 percent since April. The robust recovery was due to the increased need for re-stockpiling as buyers considered current prices were low.
Government-subsidised stocking programs also lent support to Chinese aluminium prices. As per reports, many Chinese provinces are considering commercial stockpile plan to support domestic industries. However, there are expectations that the price gain in Chinese markets may be short-lived due to weak global economic growth. A large glut in stocks may also dampen the sentiments.
Economic slump due to the deadly pandemic in the top commodity consumer China was even larger than analysts feared. The same sour economic numbers have now started to come out from other virus-infected countries. Feeble economic releases from the largest economies like the US, China, Japan and the European Union are signalling that the global economy is heading into a recession.
Looking ahead, a swift turnaround in demand is least expected. Global industrial activities continue to be on the lower side due to the negative impact of the pandemic. New tensions brewed in the markets about termination of a trade deal between the US and China and this will perhaps influence the trend of commodities in the coming days. Meanwhile, massive economic boosting measures from Central Banks could offer lower-level support to the metal. If demand collapses further, smelters may be forced to cut production which may weigh the present oversupplied market as well.
On the price side, LME stiff support is placed at $1,450 a tonne. A direct drop below the same would trigger further liquidation pressure. On the domestic futures, MCX prices having strong supports at Rs 128 and Rs 122 levels. Upside turnaround point is seen at Rs 136.
The author is Head of Commodity Research at Geojit Financial Services.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.