Aluminium needs new driver to boost demand, observes BofAML

The global economy lacks an immediate driver that could boost global growth and aluminium demand, according to Bank of America Merrill Lynch.

Digging a bit deeper on economic activity, China’s recent GDP report is a case point: while the country is stabilising, much of this was driven by relatively poor quality growth, including rising activity in financial markets, the bank said.

A cyclical rebound is Merrill Lynch's base for the coming weeks, but China’s economic restructuring will continue. This suggests that most metals are in need of a new structural growth driver, making production curtailments, especially on aluminium, even more essential.

Correlations between metals prices were high ahead of the Great Financial Crisis (GFC) and in the immediate aftermath of it. Prior to the GFC, this was heavily influenced by exceptionally strong global economic growth and Chinese demand, which swept the quotations of most commodities higher.

Meanwhile, immediately after the Global Financial Crisis, cross-asset correlations remained high partially because several governments implemented large fiscal stimulus packages and many central banks flooded the markets with liquidity. Yet, more recently, individual metals have increasingly traded on their idiosyncratic fundamentals. This has been reflected in a sharp drop of correlations.

The decline in correlations highlights that fundamentals matter for base metals. Aluminium is now trading at the levels seen in 2001.

“In our view, this reflects that the metal is a capital-driven industry, i.e. access to funding determines production decisions and producers can raise/ decrease output at relative ease,” Merrill Lynch says.

Meanwhile, other metals tend to be more resource-driven, i.e. changes to output are less influenced by funding, but more by access to mines and ore bodies.

The relatively slow rebalancing of the copper market is one reason the metal has so far traded well above average production costs, in contrast to aluminium, where almost half of the industry has negative margins.

Notwithstanding, aluminium smelters globally have sustained output at elevated levels and we believe the upside to prices is capped until meaningful curtailments emerge in both China and World ex-China.