Aluminium: recent recovery may be short-lived

Aluminium: recent recovery may be short-lived Years of chronic over-supply led by China’s lack of discipline in cutting back production capacity has seen global aluminium prices halve in since they hit a peak in 2008. Aluminium prices have started to increase in 2016 , but we believe that the recovery will be short-lived.

Aluminium prices have risen 6.7% in the past 6 months (although that may appear lackluster compared to the 37.4% return for zinc and 27.0% return for nickel).

Encouragingly we are seeing inventory held in the major metal exchanges (London Metal Exchange and Shanghai Futures Exchange) decline, indicating that commercial usage is drawing on the stock overhang.

Click to enlarge  Source: Bloomberg, ETF Securities

Speculative positioning in the futures market (an indication of market sentiment toward the metal) has recovered to levels not seen in over a year. The improvement in sentiment has been driven mainly by an increase in long positions rather than a decline in short positions.

Click to enlarge Source: Bloomberg, ETF Securities

However, a price recovery could discourage smelters from rationalising business operations, leaving the oversupply issue unaddressed.

Although China’s old smelters are often loss-making and raking up non-performing loans with their state lenders, China’s new smelters are widely viewed as the most modern and lowest-cost operating in the world. According to World Aluminium data, China’s production of aluminium increased between April and June 2016 after being on a declining trend between August 2015 and February 2016. The depreciation in the Renminbi is likely to see more of that overproduction exported and to weigh on global prices.

Nitesh Shah, Research Analyst at ETF Securities

Nitesh is a Commodities Strategist at ETF Securities. Nitesh has 13 years of experience as an economist and strategist, covering a wide range of markets and asset classes. Prior to joining ETF Securities, Nitesh was an economist covering the European structured finance markets at Moody’s Investors Service and was a member of Moody’s global macroeconomics team. Before that he was an economist at the Pension Protection Fund and an equity strategist at Decision Economics. He started his career at HSBC Investment Bank. Nitesh holds a Bachelor of Science in Economics from the London School of Economics and a Master of Arts in International Economics and Finance from Brandeis University (USA).