By Raul de Frutos
Our Aluminum MMI rose 2.7% in March, thanks to a jump in Chinese and Korean prices. However, London Metal Exchange prices lagged.
Chinese Production Down; Non-Chinese Production Up
Aluminum in China jumped to its highest price point in about six months. Chinese production seems to have fallen sharply over December and January which would help explain the strength of the local rally in prices.
Meanwhile, according to the International Aluminium Institute (IAI), non-Chinese global output rose by 3.7% in the first two months of 2016, an acceleration from growth of 2.5% in 2015. That's a surprising outcome for a market burdened by high stocks and with prices hovering near a six-year low.
Higher production excluding China has also led to steady aluminum Midwest premiums, which are hovering near $0.09 per pound. Aluminum has also recently moved from backwardation to contango as new supply has come in.
Is China Really Cutting Production?
Chinese figures are always obscure. That makes it really hard to know if China is actually cutting production or not. Some Chinese state-owned aluminum groups like loss-making Chalco are not in a good financial position and it is possible that they will be cutting production, especially in return for government assistance in stockpiling metal. On the other hand, privately owned groups like Hongqiao, Jinjiang and Xinfa are rapidly overtaking western giants such as UC Rusal both technologically, in terms of capacity, but most importantly in terms of production costs. Hongqiao is now the world's largest aluminum company, a distinction it took from Rusal. These groups might want to increase production to gain market share if unprofitable companies actually cut production.
Aluminum Prices Missing the Broad Metals Rally
Although prices in China rallied, aluminum LME prices finished the month down. While most base metals gained in Q1, aluminum has simply missed the rally.
Nickel is another metal that finished the quarter down. So far, the poor performance of these two metals gives less credibility to the broad rally in base metals.
Chinese Exports Down
One of the major challenges for the global aluminum industry has been the rise in Chinese aluminum exports but recent trade numbers are encouraging for global aluminum markets. In February, China's aluminum exports declined more than 33% year-over-year, the lowest in two years.
What This Means For Metal Buyers
The long-term outlook for aluminum is still poor. Aluminum will likely need a bull commodity market to make a substantial rally. Prices in the short-term could rise, however, following the recent strength in the base metal sector and the fact that bargain hunters might want to lift prices after the slump seen last year.