By Raul de Frutos
Our Aluminum MMI rose 4% in September. Aluminum prices bounced above $1,600 per metric ton.
However, we still need to see if they will surpass stiff resistance at $1,700/mt, a level that aluminum hasn't overcome in more than a year.
Why have prices struggled to get above $1,700/mt? The simple answer is overcapacity. Upside momentum was limited this year because many analysts expected Chinese smelters to ramp up production during the second half. However, Chinese aluminum production continues to fall in the second half.
According to data released by the International Aluminum Institute, Chinese production declined 0.8% in August from the same month last year. For the first eight months, production in China has fallen 2.8%.
Demand Up (For Now)
Global aluminum demand is expected to grow 3-5% this year. The key factor here is higher Chinese aluminum demand, thanks to a rebound in the country's property market due to government stimulus. On the other hand, some people fear that the impact of these stimulus measures might be fading. Having said that, the possibility of rising supply is a much bigger threat than a slight moderation in demand.
Rising demand, combined with falling supply means one thing: falling exports. For the first eight months of the year, Chinese aluminum exports have fallen 4%. Any increase in China's aluminum supply would cause exports to come back, denting market sentiment. However, as we mentioned above, we haven't seen that yet.
Japanese Premiums Fall
Japanese Premiums, the price that Japanese aluminum buyers will pay over the London Metal Exchange cash price, fell to $75/mt. This price will serve as the benchmark for Asian physical markets in the fourth quarter, down 20% from the previous quarter and the lowest level since 2009.
What This Means For Metal Buyers
Aluminum markets will record a deficit this year unless Chinese production rises sharply in the remaining four months of the year. That, combined with the ongoing bullish sentiment in the metal complex could put aluminum prices finally back above $1,700.