Aluminium prices drop nearly 30% amid trade war woes; will they recover?

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Novorossiysk, Russia - August 20, 2017: Aluminum ingots Transportation of aluminum for export

China will remain the driving force of global aluminium prices. If the trade tensions and global microeconomic headwinds continue, prices would remain under pressure

Aluminium prices in the key LME platform (London Metal Exchange) dipped to a near three-year-low. Escalating US-China trade war tensions and subdued demand from the automobile sector weighed down the sentiments.

Domestic prices to follow suit but a weak Indian Rupee offered lower-level support. In LME, prices declined more than 28 percent since mid-2018 when the world’s top two economies started imposing tariffs on each other.

Trade war worries that continued for the last 15 months hit the global economic sentiments adversely and fanned fears of a possible recession.

Recently, International Monetary Fund (IMF) reduced its 2019 global growth forecast to 3.2 percent, lowering 0.1 percentage points from their earlier estimate indicating that the trade conflict has put a strain on the global economy.

Aluminium is widely used in industries like automobile as well as packaging. Feeble global economic momentum hit the automobile sector, which is one of the biggest consumers of the metal sectors.

The global automobile sector accounts for almost 30-40 percent demand for the light metal. Reports say that global automobile production tumbled by more than 7 percent since the start of the year against a 1.7 percent growth in the previous year.

Weak economic sentiments hurt the global business confidence prompting cutback in business spending and weakness in manufacturing.

Meanwhile, despite the downbeat demand expectation, the global aluminium market is remained undersupplied. As per Aluminium Institute, data cumulative production in the first eight months of 2019 slid by 0.6 percent.

Output throughout the globe, especially from China, Latin America and Western Europe, has declined during this period.

China is the world’s largest Aluminium producer accounts for about 55 percent of global supplies estimated about 65 million tonnes per year.

As per International Aluminium institute data, China’s aluminium production has been down by 13 percent so far this year compared to the same period in 2018.

Supply deficit in the country primarily due to the closure of about three million tonnes of production in the second half of last year.

Government’s push for stricter environmental regulations that bring higher-cost and less efficient capacity leading to a drop in output.

Amid declining global production inventories held at different warehouses contracted swiftly. Total stocks held at LME warehouse dipped below 900,000 tonnes recently, the lowest level since 2008. Stocks at Shanghai warehouse too held at two and half-year lows.

However, supply concerns and steady domestic demand kept prices firm in China. Currently, shanghai futures prices outperform the key LME where demand is lacklustre from the rest of the world.

Nevertheless, it is expected that aluminium market will be oversupplied in the coming years. Ongoing weak global demand and hopes of increased supply from China may swing to a supply glut.

Easing industrial controls and leveraged economic policies in China likely to brace industries to add more capacity that may lead to an oversupplied market later.

Looking ahead, China will remain the driving force of global aluminium prices. If the trade tensions and global microeconomic headwinds continue, prices would remain under pressure.

Increased availability and low prices of alumina, the key raw material for the industry may also affect the trend. However, any breakthrough in trade talks and policy measures taken by China government likely to spurt demand from the automobile and packaging industries later.

On the price front, LME prices likely to continue with weak bias as long as prices stay below $1,850 a tonne. Recovery moves are expected only a close above $1,900. In MCX, a choppy trade inside Rs 122-148 is expected in the immediate future

First published in Moneycontrol.

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