by Raul de Frutos on NOVEMBER 6, 2016
Our Aluminum MMI jumped to 83 points after London Metal Exchange aluminum prices hit a 15-month high. Not even a strong dollar could ruin aluminum bulls’ party last month.
Aluminum rose above $1,700 per metric ton for the first time in over a year. Aluminum supply has increased this year as rising aluminum prices triggered the release of new capacity and restarts of idled capacity. However, other drivers have pushed prices into new ground:
Energy accounts for around half of the cost for Chinese smelters to produce aluminum. Therefore, there is a close correlation between aluminum and energy prices.
Thermal coal prices in China have more than doubled this year. The price spike has been spurred by domestic mining cuts in China, with electricity generators and steelmakers making up for the shortfall via imports.
As energy prices increase, Chinese smelters are getting squeezed, making it tougher for them to keep up with production. In addition, alumina prices in China, another key ingredient for the making of aluminum, have increased around 50% so far this year.
Aluminum output is running higher this year but so has demand for the metal. Chinese demand from infrastructure and construction has been robust this year. The automotive sector, another big industry for aluminum demand, continues to look strong.
In September, Chinese automobile sales rose 27% from the same period last year. This is the seventh consecutive month in which auto sales have risen and the third consecutive month where growth was above 20%. The growth rate this year is substantially higher than last year.
Investors Are Buying Metals
Industrial metals entered a bull market earlier this year and aluminum is finally playing catch up. Our historical analysis shows that a metal has far greater upside potential when the overall commodities market is in bullish mode while its chances of going down increase in a falling commodities market.
When commodities are on the rise, aluminum investors tend to overreact on bullish news while dismissing bearish news. That’s what we are seeing right now.
What This Means For Metal Buyers
Industrial metals have been in bullish mode since early this year. Aluminum prices are finally jumping on the bandwagon. Aluminum buyers should minimize their price risk exposure if they haven’t done it yet.