May 5, 2016
Our Aluminum index rose to 80 from 75 points in May, a 7% rise.
LME aluminum prices recently hit a nine-month high. Investors are now scratching their heads trying to figure out the cause of such a sharp increase.
Markets Still Oversupplied
If we narrow our view to the specific supply/demand fundamentals in the aluminum industry, it’s really hard — if not impossible — to find a reason for the price increase. The aluminum industry still seems oversupplied and April marked another month with little to no willingness for production shutdowns.
On top of that, Chinese aluminum exports surged in March, up 17% year on year. The steep rise in aluminum exports is a negative for aluminum markets as it exemplifies the issue plaguing global aluminum markets. Interestingly, though, prices reacted — in this instance — in a bullish manner.
Meanwhile, the U.S. is investigating whether aluminum imports are harming the domestic industry, an inquiry that could help pave the way for new import tariffs. Aluminum prices are more global in nature than steel prices since they are decided by exchanges. If import duties were imposed on aluminum products, aluminum producers couldn’t arbitrarily hike their selling prices. However, duties could potentially bring U.S. Midwest premiums up, which are now hovering near $0.08 a pound.
Commodity Markets Rebound
In our April MMI report, we warned that: “The long-term outlook for aluminum is still poor. Prices in the short term could rise, however, following the recent strength in the base metal sector”
The best explanation for higher aluminum prices is the recent rebound in commodity and base metals markets. If you are a frequent reader, you’ve probably heard us saying that based on our own historical analyses, 70% of the price movement of an individual metal is caused by the movements in the commodity and base metal sectors. Which is exactly what we saw during the month of April.
Aluminum prices got a tailwind thanks to a recovery in commodity markets. Every single industrial metal rose in April. The ongoing recovery in oil prices, a weaker dollar and a potential boost in demand for base metals thanks to Chinese stimulus are the real factors explaining this move in aluminum prices.
If commodity markets continue to improve, we should expect higher aluminum prices even when most people would agree that the market is still oversupplied. The extent of this rally will likely depend on how successful China proves to be in boosting spending. Back in 2009, the positive sentiment lasted for more than two years. At present, we have no way of knowing how long Beijing will keep this up.
Shares of Aluminum Producers Jump
Not surprisingly, the stock prices of aluminum producers such as Alcoa, Inc. or Century Aluminum jumped on higher aluminum prices. Investors betting on a recovery in aluminum prices would increase their exposure in these companies given their strong price correlation with aluminum prices, as their earnings are very sensitive to the metal’ price movement.