Aluminum MMI Flat, But Markets Look Tighter

| About: iPath Dow (JJU)

Original post

By Raul de Frutos

Our aluminum MMI fell by one point for the month as investors seemed unwilling to chase prices much above $1,600 per metric ton.

Surplus or Deficit?

There is still a divided opinion over whether aluminum is in a surplus or a deficit this year. On one side is the opinion that China hasn't cut enough capacity and that its smelters are planning to increase output after a modest recovery in prices this year. Meanwhile, many others believe that aluminum markets will record their first deficit year in a decade.

Aluminum_Chart_august_2016_FNL

According to the latest figures released by the International Aluminum Institute (IAI), Chinese aluminum production has now fallen on a year-over-year basis in five out of the last six months. For the first half, Chinese aluminum production has fallen by 3.3% compared to the same period last year. If things continue like this, this will be the first year where Chinese annual aluminum output declines.

Rising Aluminum Demand

While production is likely to fall this year, unless Chinese smelters decide to ramp up production, demand is also looking pretty good. Real state indicators in China for the first half are much better than last year. Also China's car sales continued to climb in June, up 18% from June of 2015. Finally, the Caixin Manufacturing PMI in China rose above 50 points for the first time since February 2015.

Looking at the Chinese aluminum demand indicators, aluminum's demand could grow in the ballpark of 5-6%, as most aluminum producers are projecting, especially if China continues to provide stimulus in the second half.

So, for the first half of the year, China's aluminum demand rose while production fell. This is also being reflected in exports this year. China's aluminum exports rose by 10% y-o-y in 2015. However, for the first half of 2016, exports have fallen by more than 9%. Falling aluminum exports are a welcome sign for U.S. aluminum producers.

Midwest Premiums Fall

For aluminum buyers, the all-in aluminum price consists of the aluminum price plus regional aluminum premiums. U.S. Midwest premiums fell slightly in July, with current quotes of $0.07 per pound. The picture doesn't look any better in Europe where physical premiums are near their all-time lows.

The ongoing weakness in premiums this year might look surprising, given falling exports and a projected deficit this year. Some analysts attribute this weakness to the current flow of aluminum from non-LME-registered warehouses to physical markets.