Continuing strength in aluminum prices to benefit Alcoa

It has been a remarkable year for aluminum. The metal, which plunged about 17% last year due to feeble demand, has gained more than 15% this year as production cuts from the likes of Alcoa Inc., Rusal and Rio Tinto have helped in bringing the market back to equilibrium. Aluminum prices have finally crossed the $2,000 mark this year. Recently, it rose to an 18-month high. However, lately, there have been some concerns over whether the rally will continue.

The metal retreated about half a percentage on the London Metal Exchange recently after worse-than-expected factory activities data emerged from China last Thursday. HSBC's preliminary Purchase Manager's Index (PMI) for August stood at 50.3, the weakest reading since May. Analysts polled by Reuters had expected a reading of 51.5 following a multi-month high reading of 51.7 in July.

Although a reading of above 50 signals expansion, a slide in the index also indicates that China is losing some momentum. The weaker-than-expected data comes at a time when Beijing is witnessing slump both in the industrial output and credit growth.

There are concerns that aluminum demand in China, which is the world's biggest consumer and producer of the metal, could fall due to a slowdown in the economy. Adding to this concern is the fact that unlike the West, China has been continuing to smelt aluminum. Production cuts carried by North American and European aluminum smelters allowed the market to turn into a deficit in 2013 following a period of supply glut, accumulated since 2011. However, market participants fear that a slowdown in factory activities in China and continued production could once again lead to an oversupplied market. That fear is obvious. China's unwrought aluminum output rose 7.9%, year-over-year for the first five months of the year to 9.59 million tons even as Western smelters continued to slash the production.

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