By Raul de Frutos
Just a few days after hitting a 15-month high, the aluminum rally cooled down as prices inched lower over the past few days.
So, where are aluminum prices heading? Is it now a good time to hedge/buy forward? The short answers are: up and yes. But let's explain this view a bit further.
A Bull Case
3-Month LME aluminum prices trending higher this year. Source: MetalMiner analysis of Fastmarkets.com data.
Concerns about rising supply in China kept a lid on prices for most of this year. However, market dynamics have changed somewhat over the last few months. China's aluminum supply has been in check, with data showing a slight decline in the country's aluminum exports this year.
What's Coal Got to Do With it?
Helping keep supply in check is the recent spike in coal prices as coal is used in alumina refining. Thermal coal prices in China have more than doubled this year. As energy prices increase, Chinese smelters are getting squeezed, making it tougher for them to keep up with production. In addition, alumina, which is then processed to produce raw aluminum, has risen steeply in price over the last couple of months.
Meanwhile, even the most pessimistic estimates put the annual demand growth rate at about 4%. Not only that, but Chinese aluminum demand has been better than expected. Chinese demand from infrastructure and construction has been robust this year. The automotive sector, another big industry for aluminum demand, continues to look strong.
Adding to the bull case for demand growth in China is the expected boost in U.S. infrastructure spending, following Republican nominee Donald Trump's election victory. Trump originally said he intends to spend more than $500 billion on the infrastructure sector, twice the amount that Hillary Clinton was looking to allocate. That amount doubled to $1 trillion during the last weeks of the campaign. Demand for industrial commodities such as aluminum will benefit from that and given already the investor's bullish sentiment on the whole industrial metal complex, it's reasonable to expect aluminum prices to trend higher.
When To Buy Aluminum
The recent price correction is normal within the context of a bull market. Aluminum prices continue to make a series of higher highs and higher lows. Given the bullish price action and the shift in fundamentals, we would expect aluminum prices to quickly rebound and trend higher. Now seems like a great time for aluminum buyers to minimize their risk and protect themselves against "unexpected" upside moves like the one we recently saw in copper.