Aluminium emerges as top performing industrial metal in 2017

Aluminium has emerged as the best performing industrial metal of 2017, as growing confidence that China will take steps to end a supply glut pushes prices to the highest level in almost three years.

The industrial metal, which is used in everything from drinks cans to cars to girders for construction, has climbed close to 15 per cent this year outpacing the 2.7 per cent increase for zinc and 3.1 per cent advance for copper. Aluminium for delivery in three months is currently trading at $1,933 a tonne.

Since the financial crisis, a glut of supply has cast a shadow on the market as Chinese producers have spent billions investing in new capacity and the latest smelting technology. Now, after tackling excess capacity in coal and steel industries, there are signs Chinese authorities are turning their focus to the lightweight metal.

“There has been a big shift in China’s approach to aluminium supply,” said Eoin Dinsmore, an analyst at commodity consultancy CRU in London. “And in commodity markets nobody wants to bet against the Chinese government.”

That is raising hopes among investors the market could finally swing to a deficit, where demand outstrips supply. The metal is a key source of revenue for several major mining companies such as Rio Tinto, Norsk Hydro and Vedanta Resources.

Earlier this year, authorities in China issued a directive that will shut down aluminium capacity during the winter in areas surrounding Beijing, in an effort to cut air pollution.

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China’s top economic planning agency, the National Development and Reform Commission, then announced plans to crack down on illegal projects in the aluminium industry, instructing local governments to inspect smelters built after 2013 to test if they meet environmental regulations.

Then last week Changji, a city in the north-western region of Xinjiang — the new hub of China’s aluminium industry — said they had suspended the construction of three new smelters with 2m tonnes per year of capacity.

“Pollution control and supply-side reform are the main priorities of China’s central government,” analysts at Morgan Stanley noted. “The aluminium industry has been unprofitable and a key contributor to pollution in China with 90 per cent of its power from coal-fired plants."

In spite of the signals emerging from China, some analysts believe the run-up in prices has been overdone. According to Mr Dinsmore, there are plenty of new projects ramping up in China and state-owned companies have been active in announcing new projects.

“It’s not like coal where you get a big reduction in output, it will just be slower growth in the future,” he said.

Positioning also looks overextended. Data from the LME show hedge funds and other speculators have amassed a near record number of bets on higher prices. An announcement of actual production cuts is likely to be needed to drive prices above $2,000 a tonne.

“If such production cuts do not materialise over the second half of this year, price pressures are likely to mount given the domestic market surplus [in China],” analysts at Standard Chartered warned.