Aluminium MMI falls, battered by the almighty dollar

The December Aluminium MMI index fell 3% to 70 points, yet another all-time low. Aluminium prices fell in November, although they held much better than other base metals. Still, three-month alumiinum on the London Metal Exchange hit a new low at $1,432/mt. As with the rest of the base metals complex, a strong dollar is driving prices down.

China is still overproducing

According to the latest data, Chinese aluminium output has risen 18% on the year to date despite falling demand. This has led to a 14% increase in aluminium exports this year (to date). One of the reasons China doesn’t cut production is its smelters’ ability to withstand low international prices.

Recently, China’s government announced its plans to introduce more competition into its power sector that could potentially lower electricity prices there. Given that power makes up 40% of the cost of producing aluminium, Chinese smelters’ margins would significantly improve on lower electricity prices.

Chinese smelters this year already pressured domestic power companies to reduce electricity tariffs and some smelters have managed to reduce costs by 35%. In addition, energy prices keep falling. Crude oil, a good benchmark for energy prices fell yesterday near seven-year lows.

China to buy up aluminium

It is said that China will stock up its aluminium reserves by buying 900,000 mt of aluminum at current prices to reduce the oversupply that has battered markets. This seems like a bad idea, just like Beijing’s poorly thought-through intervention in the stock market last summer when it stepped in to buy shares to prop up the domestic market.

Most likely, the actions will only produce a temporary price boost if anything. Also, it could be counterproductive as it might encourage mining companies to put off the needed production cuts, prolonging the market pain.

What this means for metal buyers?

Aluminium prices continue to trend lower. Current macro-drivers keep suggesting more market lows to come. China’s action to rebalance the market looks like a sign of desperation, suggesting that a sustainable price recovery is not around the corner.