By Raul de Frutos
I know that the fundamentals for aluminum look poor: Sluggish demand and too much capacity with little to no willingness for production shutdowns. That doesn't really make for a price uptrend. Or does it?
Aluminum price hits nine-month high. Source: FastMarkets.com.
It does if aluminum gets a tailwind, and that tailwind is a bull commodity market which is what appears to be in the cards right now.
Aluminum might not need many mine shutdowns before we see higher aluminum prices. What aluminum needs is investors to believe that the slump in commodity prices is over and that China will drive demand with its stimulus measures.
What is China Up To?
There is no reason to rack our brains trying to predict how much production is actually being cut in China. If output restarts as prices go up, or how much aluminum will the Chinese export over the next few months, and how that will impact aluminum prices.
The industrial metals ETF (in green) vs. oil prices (in black) moving together. Source: @StockCharts.com.
The truth of the matter is that every single base metal hit multi-year lows early this year and, ever since, they've all trended higher. Not coincidentally, industrial metals hit bottom with oil prices and that happened around the same time the dollar started to weaken. We are even witnessing a broad rally in precious metals with silver prices rising to an 11-month high just as aluminum hits its 9-month high.
Supply and demand balance does not determine price. If so, how much is aluminum worth when supply equals demand? This is all subjective and supply and demand won't necessarily need to meet at a certain point for prices to finally pick up. It will, however, depend on investors' sentiment and, right now, it's being driven by macro factors like a sugar rush of stimulus investment by Beijing.
Sorry to disappoint, but in this post I won't talk about aluminum trade cases, Chinese exports or its government's stockpiling strategy. It's okay to singularly look at these issues when they are what's actually moving prices, but it's the overall trend in commodity markets which might be turning up, bringing aluminum with it. If the aluminum bears narrow their view onto the specific fundamentals of the aluminum industry right now, they might find themselves caught off guard on a potential bigger move.
What This Means For Metal Buyers
The data shows us that many signals suggest that this rally in commodity markets could continue. Aluminum prices are starting to pick up and so are other industrial metals. Watch oil prices, the dollar, commodities markets and the price performance of other industrial metals. Don't get caught as prices find momentum. In this period, it is extremely important to understand the big picture and have a defined purchasing strategy.