Aluminium still unstable as demand rises in China

Aluminum prices are likely to remain unstable, largely due to mixed developments in the market since the beginning of the year. According to the International Aluminium Institute (IAI), while production is leveling off worldwide due to significant cutbacks, demand is steadily rising in China, the world’s largest consumer of the metal.

“Overall, the market is facing a weak demand situation. Thus prices could come under pressure, particularly if London Metal Exchange (LME) inventories continue to rise. In the short-term, prices are rising along with the tide, but we foresee a correction before an actual recovery on the back of demand comes next year,” said Amar Singh, head of commodities research at Angel Broking.

LME inventories are at their highest levels in a year, and Chinese aluminum stocks are at 500,000-600,000 tonne. At present, alumi­num inventories are close to their all-time high, surging 97 per cent to 4,617,975 tonnes, compared with around 2,338,300 tonnes since the beginning of calendar 2009. This is an indication of the state of instability that the aluminum market is in, as in the same period, prices have shot up by 25 per cent.

However, the metal’s future price movement hinges a lot on China, which dominates the global alumi­nium industry, accounting for a large chunk of both world production and consumption of primary aluminium. In the first six months of the year, China produced 5.67 million tonnes of primary aluminium, down 14.40 per cent year-on-year, while consu­mption dropped 4.40 per cent to 6.02 million tonnes and net imports made a record high of 9,00,000 tonnes. Its alumina output and consumption fell by 4.60 per cent and 5.40 per cent, respectively, to 10.62 million tonnes and 11.41 tonnes.

With falling production in China and its rising dependence on imports, analysts are keeping their fingers crossed. According to Navneet Damani, research analyst at Anand Rathi Financial Services, the entire base metals complex saw a rally on the back of demand from China. Now, everybody in the world is worried whether China will be able to sustain the rally. Will the equity indices hold the gains and will the physical metals bought by the country be used for industrial purposes or are they just meant for storage? These questions will take some time to be answered.

We will have to wait for a few more days before the picture gets clear, Rathi said. According to Gnana­sekar Thiagarajan, director at Com­trendz Research, “There were fac­tors such as bullishness across base metals for the rally. Also, China announced that its second quarter gross domestic product was up 7.90 pe r cent year-on-year. But, the most important factor was the continued flow of the primary metal into China over the past few months. Chinese import data for June showed that 267,681 tonnes of primary alumi­nium flowed into China, the second highest level on record.

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